ETF XRAY

Bank of England Rate Cut Lifts ETFs

By Carl Delfeld of the Chartwell ETF Advisor

After Canada cut its benchmark rate earlier this week, attention now turns to England and the European Central Bank. And what would be the effect on markets and the exchange-traded funds that track them?

The Bank of England today cut interest rates from 5.75% to 5.5% on Thursday as its monetary policy committee judged that worsening conditions in financial markets and a tightening supply of credit had increased the risks to growth and inflation.

“Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow,” the Bank said in a statement released alongside the decision. The rate cut will probably help support and strengthen the value of the US dollar.

In terms of the UK ETF (EWU), it will cut both ways by increasing prospects for economic growth but weakening the pound short term. The move also increases the likelihood that the ECB will also trim its benchmark rate.

Click here for the full statement by the Bank of England. Find out if the UK ETF (EWU) is recommended by the Chartwell ETF Advisor.

Sterling Slide Against Euro and Dollar Hits ETF

By Carl Delfeld of the Chartwell ETF Advisor

The United Kingdom market and the exchange-traded iShares fund that tracks it (EWU) has benefited from one of the highest interest rates and strongest currencies in the group of G 10 countries. But banking and real estate problems are being translated into a weaker currency and fueling speculation that the next move of the Bank of England will be to cut interest rates to stimulate the economy and help real estate markets.

The pound on Monday fell to a 14-month low against the euro and dropped below $2 against the dollar for the first time in a month. A weaker pound has a negative effect on returns for American investors in the UK exchange-traded fund which is unhedged.

Sterling fell to a low of £0.6962 against the euro, its weakest level since July 2006, before pulling back to stand down 0.5 per cent at £0.6951 by late trade in New York. The pound dropped 0.6 per cent to $1.9945 against the dollar, having hit a low of $1.9916 in the session. Sterling also fell 0.6 per cent to Y230 against the yen and 0.6 per cent to SFr2.3760 against the Swiss franc.

The UK ETF (EWU) is heavily slanted to the financial services sector but is trading at historically attractive valuations. Is current weakness in the ETF and sterling a problem or an opportunity? Find out by joining the Chartwell ETF Advisor.

Bank of England and UK ETF Play it Cool

The UK exchange-traded fund (EWU) is taking its hits like most Euro ETFs and since it has a few finanncial giants like Barclays with heavy weightings in its ETF basket, it is trading at only about 11 times earnings. The market has also been punishing high yielding currencies like the pound. Sterling fell below $2 for the first time in over six-weeks today as expectations for further UK interest rates rises tumbled after inflation data came in far weaker than expected.

Barchart reports that the European Central Bank today injected extra reserves into the banking system for the fourth consecutive business day. However, the ECB only injected 7.7 billion euros ($10.5 billion) and said that euro interest rates are "close to normal." The Bank of Japan today returned to normal operations and drained $13.6 billion from the banking system.

This is just a snapshot of the flurry of activity by central banks around the world to deal with what is perceived as a potential global liquidity crisis. But while monetary authorities in the eurozone, US, Japan, Canada, Australia and Switzerland have injected cash into the global banking system, the Financial Times reports that the Bank of England has not lifted a finger. That is despite overnight rates at one point reaching 75 basis points more than its 5.75% target rate.

The British are playing it cool because some 57 UK banks can borrow limitless cash at any point from the Bank of England, but only at a price of 1% above the target rate. This is both sensible, simple and elegant. Banks can access cash but will pay a price for poor planning and strategy.

By Carl Delfeld of the Chartwell ETF Advisor

Bank of England Raises Rates Again: Impacts ETF

The UK exchange-traded fund (EWU) reacted negatively this morning to the Bank of England's decision to raise interest rates for the fifth time in the last year to 5.75%. By raising rates a further 25 basis points – to the highest level in more than six years – the Bank expressed its concern that the current pace of economic activity is not conducive to inflation staying close to the government’s 2 per cent target.

The British pound did strengthen on the basis of the higher rates and the UK market does not appear to be overvalued at just over 12 times earnings.

The UK rate rise also increased the probability that the European Central Bank will raise rates next time it convenes in September. European stocks this morning are trading mildly lower with the DJ Stoxx 50 index trading -0.22%. China's Shanghai-Shenzhen 300 index today fell sharply by -5.51% on plans for $20 billion in upcoming share sales. However, the other major Asian stock markets today are trading higher. The Nikkei index today closed +0.29% and the Hang Seng closed +0.16%.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Strong Pound, Euro Buoy ETFs

A strong pound and euro this week have helped European exchange-traded funds continue their robust performance and both currencies are likely to get stronger with more interest rates hikes expected this summer.

The Financial Times reported that the European Central Bank is firmly expected to raise its main rate by a quarter point to 4 per cent in June. The euro hit a succession of two-year highs against the dollar this week. And the minutes from the Bank of England's monetary policy committee meeting earlier in the month suggested that an interest rate increase to 5.5 per cent in May was all but a done deal.

Against the backdrop of steady economic activity in Europe is the anticipation that the next move by the Fed will be to lower interest rates. This will widen the gap and likely sent the euro and pound higher. Remember that country-specific ETFs are not hedged against the dollar. The UK exchange-traded fund is (EWU) and a good proxy for the overall European markets is the iShares S&P Europe 350 (IEV).

By Carl Delfeld of the Chartwell ETF Advisor

British Pound Breaking $2 Level Will Impact ETF

The British pound today broke through the $2 mark for the first time in nearly 15 years and a good question is what impact this will have on the UK exchange-traded fund (EWU). Traders may have been reacting to new data that showed an unexpected surge in inflation, prompting speculation of interest rate increases.

While a rising currency helps the performance of foreign country iShares ETFs since they are not hedged against the U.S. dollar, rising rates usually hurt a stock market because it leads to slower economic growth.

However, there are times when increasing rates are seen as a positve for markets since it signals responsible monetary management to stem inflationary pressures.

Jane Wardell writes that the rising CPI rate, well above the Bank of England's target of 2 percent, adds pressure for a further rise in official interest rates, which are currently at 5.25 percent. The bank has raised the base rate by three-quarters of a point since August and economists had been predicting one more rise in the coming months to close off the current cycle of increases -- but the data has prompted speculation about more than one hike.

Another way to play the rising British Pound is through the CurrencyShares British Pound (FXB) ETF.

By Carl Delfeld of the Chartwell ETF Advisor

Mega Caps a Drag on UK ETF

By Carl Delfeld of the Chartwell ETF Advisor

While the United Kingdom exchange-traded fund or ETF (EWU) has been doing quite well and the FTSE 100 is at a six-year high, it has been weighed down by the lackluster performance of its mega cap stocks. The twelve largest companies in the index account for a surprising 54% of the index. These dozen companies have underperformed the overall index this year by 6.8%.

The Financial Times reported that Citigroup research also highlights that the valuations of big companies are falling behind smaller companies. Europe's 50 largest companies trade at about 12 times forward earnings versus 14 times for large caps and 16 times for mid caps. In 2000, the valuations were reversed.

One explanation is that global investors do not appreciate the stability of earnings from the mega companies in the current risk taking environment and also the role of M&A and private equity which is centered on smaller companies.