The European Central Bank [ECB] raised its benchmark interest rate a quarter-point to 4.0%, as widely anticipated -- the highest it has been in nearly six years. More importantly, market participants await comments by ECB president Jean-Claude Trichet. Following the announcement the DAX was down 1.4%, the FTSE 100 -0.9% and the CAC 40 -0.6%, similar to their pre-announcement levels, as indices traded lower across Europe. Trichet is expected to signal further hikes are necessary, but there's wide debate as to how much higher. Many economists forecast another hike to 4.25% in 2007. MarketWatch reports Goldman Sachs analysts raised their ECB rate forecast a quarter-point to 4.5% for '07. They do not expect the Federal Reserve to lower rates this year, after previously expecting 0.75% of cuts. A growing number of analysts and fund managers say rising interest rates and thus bond yields are becoming more attractive to investors and competing against equities.
Sources: MarketWatch [I, II, III]
Commentary: Rising Bond Yields (or, The Magazine Cover Indicator Lives!) • Implications of the Ongoing Dollar Decline • UN Report: The Dollar's Imminent Collapse is Being Caused by U.S. Debt
Stocks/ETFs to watch: iShares MSCI EMU Index Fund (BATS:EZU), Vanguard European ETF (NYSEARCA:VGK), DJ STOXX 50 ETF (NYSEARCA:FEU), DJ Euro STOXX 50 ETF (NYSEARCA:FEZ) , iShares S&P Europe 350 Index Fund (NYSEARCA:IEV). Currency funds: CurrencyShares Euro Trust (NYSEARCA:FXE), PowerShares DB G10 Currency Harvest (NYSEARCA:DBV). Bond funds: iShares Lehman TIPS Bond (NYSEARCA:TIP), iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond (NYSEARCA:IEF), iShares Lehman 20+ Year Treas Bond (NYSEARCA:TLT)
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