The European Central Bank (ECB) president Mario Draghi surprised the global market yesterday by giving cues of further policy easing in its March meeting. This came on the heels of Draghi’s repeated assurance of a more intensified and protracted policy easing, if need be.
With the Eurozone growth picture still dull and the inflationary environment slackening considerably, prospects of further rate cuts and a likely raise in ECB’s ongoing QE measure have high chances of manifestation. Draghi reaffirmed that the ECB will evaluate and ‘possibly reconsider’ the monetary policy in the March meeting.
The reason behind this dovish stance was a 12-year low Brent crude which ruined the possibility of any improvement in inflation in 2016. The ECB economists had projected the annual inflation rate to inch up ‘from 0.2% recorded in December 2015 and average 1% this year, rising further in 2017’.
But with oil prices sliding 40% more than the time when the projections were made, Draghi is now skeptical of inflation in 2016, as per the Wall Street Journal. At present, ECB expects 2016 inflation to be 0.7% (down from 1% projected earlier) while inflation for 2017 is expected to be 1.4% (down from 1.5% guided previously) (read: Dovish Draghi Drives Up These European ETFs).
The ECB took several meaningful steps in last two years to bolster the common currency bloc. It launched an asset buying program at the start of 2015 and extended the program by six more months to March 2017 at the end of the year. The bank also cut its deposit rate by 10 bps, shoving it deeper into the negative territory to -0.3% (read: 4 European ETFs to Buy on Cheaper Valuations, QE Launch).
While the markets did not appreciate ECB’s year-end stimulus measure as they expected an outsized expansion in the QE policy and steeper cuts in interest rates, global stocks liked ECB’s statement this time around.
Several Eurozone ETFs rallied on January 21 post Draghi’s comment. Among the toppers were the iShares MSCI Italy Capped ETF (NYSEARCA:EWI), the Barclays ETN + FI Enhanced Europe 50 ETN (NYSEARCA:FEEU), the Credit Suisse FI Enhanced Europe 50 ETN (NYSEARCA:FIEU), the iShares MSCI United Kingdom ETF (NYSEARCA:EWU) and the iShares Currency Hedged MSCI EMU ETF (NYSEARCA:HEZU) with gains of about 2.9%, 1.8%, 1.5%, 1.4% and 1.3%, respectively. Euro also shed gains as evident by 0.03% losses incurred by the CurrencyShares Euro Trust ETF (NYSEARCA:FXE). The fund shed more gains of about 0.1% afterhours.
ETFs to Play
Investors may take advantage of this euphoria in the European market. The first option is to bet on our top-ranked European ETFs. Below, we highlight two options.
Deutsche X-trackers MSCI Germany Hedged Equity ETF (NYSEARCA:DBGR)
DBGR is a hedged German equity ETF providing exposure to 56 firms. The fund focuses on Consumer Discretionary, Financials and Health Care sectors. Expense ratio comes in at 0.45%. DBGR has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. DRGR was up 1.3% on January 21, 2016.
Deutsche X-trackers MSCI United Kingdom Hedged Equity ETF (NYSEARCA:DBUK)
This hedged UK ETF has amassed about $4 million in assets. The fund holds 114 stocks presently and charges 45 bps in fees. Financials, Consumer Staples, Energy, Consumer Discretionary and Health Care have a double-digit weight in the fund. The fund was up 1.4% on January 21 and carries a Zacks ETF Rank #2 (Buy).
Investors can also play this move by shorting the euro ETFs. Below, we highlight a few choices in the inverse euro ETF space. These ETFs profit when the euro declines and may be suitable for hedging purposes against the fall in the currency.
ProShares UltraShort Euro ETF (NYSEARCA:EUO)
This leveraged ETF looks to provide twice the inverse exposure to the performance of euro versus the U.S. dollar on a daily basis. The ETF charges a hefty annual expense ratio of 95 basis points. The product was up 0.04% on January 21. Investors could book more profits off this fund, should the euro continue to struggle.
Market Vectors Double Short Euro ETN (NYSEARCA:DRR)
This is an exchange-traded note issued by Morgan Stanley. The product seeks to track the performance of the Double Short Euro Index. For every 1% weakening of the euro relative to the greenback, the index normally gains 2%. The product charges an expense ratio of 0.65% a year and advanced about 1% (as of January 21, 2016).
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