ETFs
ETFs focus on ECB’s first rate cut in five years – June 7, 2024
The European Central Bank (ECB) has finally lowered its key rate, which is the first reduction since September 2019. This decision brings the rate from its previous record of 4% to 3.75%, maintained since September 2023.
Warmongering revision of inflation projections
ECB staff revised their annual average headline inflation forecasts upwards for 2024 and 2025 to 2.5% and 2.2%, respectively, indicating a slight increase from previous estimates. However, the projection for 2026 remained stable at 1.9%. “There will be obstacles on the road to the 2% inflation target,” President Lagarde said on June 6, 2024.
Is the ECB hesitant about an upcoming rate cut?
Money markets had already anticipated this 25 basis point cut at the June meeting. President Lagarde then subtly conveyed the ECB’s cautious stance on a possible rate cut in July, suggesting that September could be the month for the next rate cut, indicating the ECB’s uncertainty over the changing economic conditions.
Bond yields rose after the ECB’s decision, as the hawkishness was noted in the ECB’s projections and comments. Not surprising, Invesco CurrencyShares Euro Currency Trust (FXE – Free report) increased by 0.15% on June 6, 2024.
Comparison with other central banks
The ECB’s decision precedes any similar action by the Federal Reserve, which remains cautious due to US inflation rates. Canada, Sweden and Switzerland have already announced rate cuts this year, reflecting a global trend toward lower borrowing costs.
Were there any warmongering tendencies during the last meeting?
Some conservative ECB policymakers regretted the explicit signal of a rate cut, suggesting they might have voted differently without such a commitment. However, despite the internal debate, the ECB remains determined to base its decisions on available data.
Focus on ETFs
Although Eurozone ETFs initially advanced, the period of hawkishness weighed on them after hours on June 6, 2024. Currency-hedged ETFs underperformed further after hours. iShares MSCI Eurozone ETF (EZU – Free report) gained 0.27% on June 6 while it fell 0.8% after hours.
On the other hand, iShares Currency-Hedged ETF MSCI Eurozone (HEZU – Free report) rose 0.16% on June 6 and fell 1.8% after hours. Meanwhile, the broader Europe ETF Vanguard FTSE Europe ETF (VGK – Free report) gained 0.4% on June 6 and 0.11% after hours.
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