The European Central Bank (ECB) and the US Federal Reserve (Fed) will be leading the stock market orchestra this week! The two institutions will make a decision about the interest rates, which will guide the economy in 2022. What does this mean for your portfolio? And which five ETFs could help you? Let’s find out 👇
Will the Fed Tighten the Screw?
Members of the US Federal Reserve will meet on Tuesday, December 14 and Wednesday, December 15 to discuss the future. And this one is cloudier than ever! Inflation has skyrocketed and the Omicron variant continues to worsen the health situation. On top of that, the United States is experiencing a slowdown in employment, which could be a factor in the discussion. Jerome Powell, who has just been re-elected as Fed chairman, will therefore have to make important decisions to make sure economic conditions don’t get worse.
Since the first lockdowns in March 2020, the Fed has injected stimulus into the market to help keep the economy running. In simple terms, the Fed is buying billions of dollars of bonds every month. Now, some members of the Fed think we should limit this intervention. The so-called ‘Hawks’ are calling for a tighter monetary policy. The process of ‘tapering’ the bond purchases has already begun. The hawks believe this will help counter inflation which, in the end, was not just transitory.
And what about Europe?
Here in Europe, we have many of the same issues as the US, with inflation rising fast. So the 24 members of the ECB’s Governing Council will meet on Thursday, December 16th to figure out the monetary policy in the euro area. They will discuss possible new measures to support the economy, such as continuing the PEPP (Pandemic emergency purchase program). This is an asset buyback system that made it possible to inject more than €1,850 billion euros into the financial markets during the pandemic.
This program expires in March 2022, so the ECB now has two options:
- Extend the PEPP but inject less money. This option is considered less likely because PEPP was supposed to be temporary, and many of the eurozone countries could have returned to pre-pandemic GDP growth by 2022.
- Increase the classic asset buyback program (known as APP) to €20 billion per month. This is a more likely option. However, some members of the Board of Governors consider this option too loose and accommodating.
Some analysts also warn that the ECB may not commit to any particular strategy for the long-term due to the ongoing uncertainty, and the new wave of Covid sweeping Europe.
How could this affect your portfolio?
The impact of these meetings will directly trigger the markets, and therefore your portfolio. Volatility could creep in as the decisions are made and publicly announced.
There could be opportunities in this environment for a handful of ETFs, which group together many stocks and bonds. The following ETFs could see some volatility depending on the monetary decisions in the coming week.
- Europe Banking Sector ETF (VanEck) which exposes you to more than 38 European banks.
- Eurozone Bonds ETF (Lyxor) made up of French, German and Dutch bonds rated AAA or AA.
- S&P 500 Index ETF (Vanguard) which tracks the movements of the benchmark index in the United States.
- US Financial Sector ETF (SPDR) made up of 65 major banks in the United States including JPMorgan Chase and BlackRock.
- USD Inflation-Linked Bonds ETF (Lyxor) which tracks Treasury bonds indexed to inflation and rated AA. This could protect your money from the damaging effects of inflation.
Do you want to know more about these diverse products? Visit our ETF Knowledge Centre to learn more.
Economic and earnings calendar
Monday – Trade balance in the Netherlands (October). OPEC monthly report.
Tuesday – Industrial production in the euro zone (October). Consumer confidence in Ireland (December). Quarterly figures from Colruyt, Compagnie des Alpes, Ceconomy, Aspen.
Wednesday – Final inflation rate in France, Spain, and Italy (November). Economic projections and interest rate decision by the FOMC in the US. Quarterly figures from Industria de diseño textil, Metro, Figeac Aero.
Thursday – Unemployment rate in the Netherlands (November). PMI services forecast and manufacturing index forecast in Germany and the euro zone (December). Trade balance in the euro zone (October). ECB interest rate decision and press conference. Meeting of the European Council. Quarterly figures from Adobe, Accenture, Fedex.
Friday – Trade balance in Spain (October). Final inflation rate in Austria and the euro area (November). Meeting of the European Council. Quarterly figures from Exel Industries.
We’ll be back next week with another edition of the BUX Breakdown. In the meantime, have a great week on the markets!
This BUX Breakdown was written by Clémentine Pougnet.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.