ECB President Christine Lagarde kept key interest rates for Euro zone unchanged in her debut policy meeting. The ECB Governing Council expects the rates to remain at their present or lower levels until inflation gets close to the two percent level. The main refinancing rate remained at 0 percent and the deposit rate at negative 0.5 percent.There is a QE policy in place at the rate of 20 billion euro per month (read: ETFs to Gain & Lose as ECB Starts QE, Cuts Rates).
The ECB forecast annual real GDP growth for the Euro area at 1.2% in 2019, 1.1% in 2020 and 1.4% in 2021 and 2022. This marks an upward revision of 0.1% for 2019 and a downward revision of 0.1% for 2020 compared with September’s projections.
The projections for annual HICP inflation were at 1.2% in 2019, 1.1% in 2020, 1.4% in 2021 and 1.6% in 2022. The outlook for HICP inflation has been revised higher by 0.1 percentage points for 2020 and lower by 0.1 percentage points for 2021 from the September projections.
Unemployment rate is projected to decline from 7.7%, 7.5% and 7.3% in 2019, 2020 and 2021 to 7.6%, 7.4% and 7.2%, respectively. The rate will fall further to 7.1% in 2022.
Overall, a moderate expected recovery in GDP growth and U.S.-China trade deal hopes may boost hawkish sentiments in the coming days.
What Does the Yield Curve Say?
Euro zone government bond yields staged a steady decline from the start of this year to late August only to record a rebound from September. The yield curve has steepened since then owing to risk-on sentiments. The spread between one-year and 10-year yields was 21.4 basis points (bps) at the start of September while the spread was 43.8 bps on Dec 11. This indicated a steepening of the yield curve.
Gainers
SPDR EURO STOXX 50 ETF FEZ
The continuation of easy money policy, moderate Euro and decent economic outlook for the Euro zone gave a boost (up 5.6%) to FEZ in the past three months (as of Dec 12, 2019). FEZ should thus continue its wining momentum. The fund yields 2.72% annually.
iShares MSCI Europe Financials ETF EUFN
Financial stocks normally underperform in a low-rate environment. However, more stimulus means more activities in the economy and greater dependence on financial institutions. Also, a steepening yield curve is a positive for the financial stocks. This is why EUFN may also stay strong. EUFN has risen 6.2% in the past three months.
First Trust STOXX European Select Dividend Index Fund (H:FDD)
Amid low rates, demand for high-yielding products should grow. So, ETFs like FDD may gain. The fund yields 4.85% annually. It added 7.1% in the past three months.
WisdomTree Europe SmallCap Dividend Fund DFE
Small-cap stocks are most exposed to the domestic economy. A better employment picture in the Euro zone should help domestic consumption. The fund yields 3.52% annually and has jumped 8.8% in the past three months (read: International Small-Cap ETFs Hit New Highs: Here's Why).
Loser
iShares International Treasury Bond ETF IGOV
The fund has sizable exposure to Europe. Weighted average maturity of the fund is 10.72 years and effective duration is 9.27 years. A faster rise in long-term bond yields is weighing on the fund as bond prices are inversely related to yields. IGOV has lost 0.6% in the past three months (as of Dec 12, 2019) and may lose further.
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WisdomTree Europe SmallCap Dividend Fund (DFE): ETF Research Reports
SPDR EURO STOXX 50 ETF (FEZ): ETF Research Reports
iShares MSCI Europe Financials ETF (EUFN): ETF Research Reports
First Trust STOXX European Select Dividend Index Fund (FDD): ETF Research Reports
iShares International Treasury Bond ETF (IGOV): ETF Research Reports
Original post
Zacks Investment Research