Europe ETFs Near Multiyear Highs After ECB's First Rate Cut

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The European Central Bank cut interest rates on Thursday, pushing Europe ETFs close to multiyear highs.

The $20 billion Vanguard FTSE Europe ETF (VGK) and the $8 billion iShares MSCI Eurozone ETF (EZU) were last trading up by 0.2% a piece, putting both close to their loftiest levels since 2008.

VGK and EZU are up 10% and 10.7%, respectively, on a year-to-date basis, which is just behind the S&P 500’s 12.7% gain.

First Rate Cut

The ECB slashed its deposit facility rate from 4% to 3.75%, the first rate cut of the cycle. While the move was widely anticipated, investors were optimistic that more rate cuts could be in store later this year.

However, investor enthusiasm was contained by ECB President Christine Lagarde’s pushback against further cuts at the July central bank meeting.

Lagarde said that the ECB was data dependent and that the next rate cut could come “much later in the summer.” 
Swaps markets are pricing in an 87% probability that the next cut comes in October, though that’s down from a 100% probability before the ECB’s latest announcement, according to Bloomberg.

Still, investors remain optimistic that the European Central Bank will reduce interest rates three times this year. The move would be supportive of stocks, all else equal.

Core eurozone consumer prices grew at a 2.9% year-over-year rate in May, above the ECB’s 2% target. That prompted the ECB to raise its inflation forecast for next year slightly to 2.2% and declare that inflation is likely to “stay above target well into next year.” 
However, “confidence in the path ahead had been increasing over the last months,” Lagarde noted, which is why the central bank felt comfortable cutting interest rates on Thursday in the face of higher inflation.

BoC Cuts

A day earlier, the Bank of Canda cut its benchmark overnight rate from 5% to 4.75%, kickstarting its easing cycle.

BoC Governor Tiff Macklem signaled that further rate cuts could be in store: “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” he said, while adding that the central bank is “taking [its] interest-rate decisions one meeting at a time.”

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