Europe ETFs Likely To Gain From Low Rates After Draghi's Tenure

The Eurozone indicated on Jul 25 that it could resort to new stimulus measures to boost its ailing economy as soon as in the September meeting. However, on Oct 31, Mario Draghi will step down as the ECB chief. Will this mean continuation of the easy money policy in the post-Draghi era?

Policies to Remain Loose

Nick Kounis, head of financial markets research at ABN AMRO, expects the ECB to slash all its policy rates by 10 bps at the September meeting, followed by another 10 bps step at the December meeting. However, economists — according to the Bloomberg Poll — see a 10 bps cut in the deposit rate in September, but “no change in December.”

The ECB’s likely next chief Christine Lagarde also hinted that she would stick to Mario Draghi’s expansionary monetary policy. On Aug 30, Lagarde noted that the European Central Bank (ECB) still has room to slash interest rates should the need be, although this may cause a financial stability risk.

However, many ECB policymakers do not see any need for a package that includes the resumption of bond buying. But banks like Goldman Sachs, Nomura, and ABN Amro foresee a new round of QE. Societe Generale sees the ECB cutting the deposit rate by 20 basis points to minus 0.6% and announcing that it’ll start buying 40 billion euros ($44 billion) a month of debt, per Bloomberg.

While monetary stimulus is great for stocks, one of the biggest losers will be the euro. Talks of more monetary stimulus can cause Invesco CurrencyShares Euro Currency Trust (FXE - Free Report) to tumble.

Also, investors should be vigilant about the performance of financial stocks. These stocks normally underperform in a low-rate environment. Though more stimulus means more activities in the economy and more dependence on financial institutions, low rates may compress banks’ net interest margin. This is why iShares MSCI Europe Financials ETF (EUFN - Free Report) may suffer. Investors should note that EUFN lost about 33.2% in the past five years against a 45.8% surge in the S&P 500.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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