Industry Updates

Investors offload European equity ETFs as hawkish ECB decision looms

BlackRock says markets are overly hawkish on ECB rate rises

Theo Andrew

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Investors offloaded several European equity ETFs over the past week with many expecting the European Central Bank (ECB) to take a more hawkish stance when it meets on Thursday.

Markets have priced in the likelihood that the central bank will increase rates, with hikes anticipated into 2023, after Eurozone inflation reached a new high of 8.1% in May.    

The STOXX 50 fell 1.5% last week on the inflation news but saw a bounce in performance on Monday after China announced it would be easing some of its COVID-19 restrictions. Performance over the month has been comparatively strong, up almost 8% in the 30 days to 7 June, but remains 12.2% down over the year to date.

However, this was not enough to reverse a 16-week streak of outflows in European equities, according to the Bank of America (BoA), with passive funds globally recording $1.8bn of outflows last week.

Leading this, the iShares Euro STOXX Banks 15-30 UCITS ETF (EXX1) saw $351m of assets leave the product in the week to 7 June, according to data from ETFLogic.

Elsewhere, investors were spooked by the hawkish tones of the ECB with multiple Euro STOXX 50 ETFs, the Eurozone’s flagship bluechip index, recording outflows.

The iShares Core Euro STOXX 50 UCITS ETF (EUE) outflows totalled $355m over the same period, while the Xtrackers Euro Stocks 50 UCITS ETF (XESC) recorded outflows of $246m.

Furthermore, the Amundi Euro STOXX 50 UCITS ETF (C50) saw outflows totalling $82m.

In a research note, BlackRock said it downgraded European equities in May, citing increasing stagflationary risks, adding it had moved neutral on all developed market equities, including the US.

Despite this, it said markets have overestimated how much the ECB will hike rates, believing that the central bank is likely to move rates out of negative territory before turning dovish in the face of a “1970s-style energy crisis”, following its decision to ban most Russian crude oil imports which it predicts will lead to a natural slowdown of the economy.

“The ECB is set to confirm this week that rate increases are imminent, and markets expect it to hike well into 2023. The problem: markets have been primed to assume hawkish intent and are quick to perceive risks of overtightening. This keeps us neutral on equities in the short run,” BlackRock said.

“We could see another sharp policy pivot in the coming months, this time a dovish one. This would be a catalyst to go back to overweight equities,” it added.

In a separate BoA research note, it said it expects the ECB to be more hawkish this year, hiking interest rates by 1.5% – taking the ECB’s main rate to 1% – before stopping the hiking cycle in 2023.

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