MW ECB jumps ahead of the Fed to deliver its first rate cut. Is now a good time to invest in Europe ETFs?
By Isabel Wang
European stocks are still searching for a catalyst to break recent record levels, but the ECB rate cut doesn't seem to be one, strategists say
Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at Europe exchange-traded funds on the back of the first interest-rate cut by the European Central Bank since 2019. Investors are fretting over whether there's room for these regional equities to build on their record-hitting rally so far this year.
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It was a big day for the European Central Bank and its watchers, but financial-market investors were far from excited.
Read: ECB decision: First rate cut in 5 years delivered, jumping ahead of Fed
The European Central Bank on Thursday cut interest rates for the first time in nearly five years, taking the bank's deposit rate from a record 4% to 3.75%.
The widely expected move sent only a gentle ripple through financial markets in Europe and the U.S.
The pan-European STOXX Europe 600 Index XX:SXXP rose 0.7% on Thursday, closing at its second-highest level in history, while the euro $(EURUSD.FOREX)$ steadied at around $1.0891. The 10-year German Government Bond yield BX:TMBMKDE-10Y, the eurozone benchmark, rose 2 basis points to trade at 2.55%, after rising 4 basis points following the release of the ECB decision, according to FactSet data.
The decision also stirred little excitement across the Atlantic, with U.S.-listed exchange-traded funds that track European equities settling nearly flat on Thursday. The Vanguard FTSE Developed Markets ETF VEA, which has more than $134 billion under management, was up 0.3%. The iShares Core MSCI EAFE ETF IEFA, with $119 billion under management, edged up a modest 0.2%, according to FactSet data.
"It was the rate cut that everybody was expecting. It was fully priced in the market, but what did surprise the market was the upward revision for inflation for next year at 2.2%, above the 2% target for the ECB," said Morgane Delledonne, head of investment strategy for Europe at Global X ETFs.
She told MarketWatch that the ECB decision was "counterintuitive," as policy makers acknowledged higher inflation for 2025 yet began cutting rates, leaving investors "puzzled by the situation."
See: Bank of Canada Cuts Policy Rate to 4.75%, Signals More Easing Possible
U.S. investors are primarily interested in whether the actions of major central banks are compelling enough to convince the Federal Reserve to follow suit. While the Fed is unlikely to change policy direction at its June meeting next week, there has been a recent shift in market sentiment toward the idea that rate cuts are indeed on the way later this year.
Strategists said that the decisions from the ECB and Bank of Canada this week will not massively impact the Fed, as policy makers will still act independently, but it does put the U.S. central bank at the risk of dampening momentum in the dollar and economic growth.
"When other countries cut but we don't, it tends to boost their economies and depreciate their currencies, which didn't happen today [in Europe], but over time, it should cause the dollar to appreciate and suck growth out of the U.S. into Europe" through increasing export opportunities to boost GDP, said Jay Hatfield, chief executive officer at Infrastructure Capital Advisors.
The ICE U.S. Dollar Index DXY, a gauge of the greenback's strength against a basket of rivals that includes euro, has surged 2.7% so far this year, according to FactSet data. It was off 0.2%, to trade at 104.10 on Thursday afternoon.
See: Are European stocks doomed to underperform?
Some hope that the rate cut by the ECB could lift European equities in the absence of a recession, offering an appealing entry point for U.S. investors who may have missed out on the megacap tech rally in the domestic market and sought more affordable opportunities elsewhere.
European stocks' valuations do look enticing compared with their U.S. peers. The 12-month forward price-to-earnings ratio of the STOXX Europe 600 Index stood at 12.8 as of Thursday, compared with 19.8 for the S&P 500 index SPX.
"European equities are cheap, but they are cheap for a reason," Hatfield told MarketWatch in a phone interview on Thursday. "They have much worse growth prospects than the U.S. We would rather not have the downside of the European economy, because it's good that they're cutting rates, but they're cutting rates primarily because the economy is very weak."
European stocks are on an upward trajectory this year, with the prospect of a soft landing and the ECB's interest-rate cuts propelling the benchmark STOXX Europe 600 Index to multiple record highs in May. The index is up 9.5% so far in 2024, while the S&P 500 has risen 12.2%, according to FactSet data.
European stocks are still searching for a catalyst to break recent record levels, but the absence of such a catalyst could lead to the equities stagnating at their current levels, Delledonne said via phone.
Meanwhile, proximity to geopolitical conflicts in Europe and Middle East, the upcoming European elections and the limited maneuver from the ECB, as well as the growth differential with other regions, might also limit upside potential for European stocks in the upcoming quarter, she added.
As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
The good ...
Top performers %Performance YieldMax NVDA Option Income Strategy ETF 8.8 United States Natural Gas Fund LP 7.9 PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF 6.4 ARK Genomic Revolution ETF 6.4 SPDR S&P Biotech ETF 5.8 Source: Source: FactSet data through Wednesday, June 5. Start date May 30. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.
... and the bad
Bottom performers %Performance Global X Silver Miners ETF -6.1 Sprott Uranium Miners ETF -5.8 Amplify Junior Silver Miners ETF -5.5 VanEck Oil Services ETF -4.9 U.S. Oil Fund LP -4.8 Source: FactSet data
New ETFs
Global X ETFs on Wednesday announced the launch of the Global X Russell 2000 ETF RSSL, which is designed to provide investors with exposure to the small-cap equity market through access to the Russell 2000 Index RUT.Calamos Investments LLC announced the launch of the Calamos Nasdaq-100 Structured Alt Protection ETF - June CPNJ with a 100% downside protection and a 10.20% upside cap rate over a one-year period starting from June 3. CPNJ is the second fund in the firm's structured-protection ETF lineup, which offers investors protected exposure to the S&P 500, Nasdaq 100 NDX and Russell 2000. Direxion on Wednesday announced a pair of new single-stock ETFs, the Direxion Daily META Bull 2X Shares METU and Bear 1X Shares METD. The firm has now completed its suite of single-stock ETFs that individually track each stock in the so-called Magnificent Seven lineup.
Weekly ETF Reads
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-Isabel Wang
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June 06, 2024 17:04 ET (21:04 GMT)
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