Whether they like it or not, U.S. and European equities are inextricably linked these days as investors eye the moves of both central banks. Forthcoming rate cuts by the European Central Bank (ECB) could have a positive effect on both markets as investors ponder the number of cuts and the pace at which they arrive.
Both U.S. and European markets were brimming with positivity to start 2024, as both respective central banks indicated that tightening monetary policy could be at the end of its cycle. As such, rate cuts may have already been priced into a 2023 market rally and now the capital markets are expecting the U.S. Federal Reserve and the ECB to deliver on cuts.
However, cuts may not come as swiftly as anticipated. The U.S. Federal Reserve has given indications that cutting rates could be a slow and steady process as opposed to a sprint to the finish line and likewise, the ECB is following suit.
Too Soon to Declare Victory
“ECB president Christine Lagarde said last week rates had likely reached their peak but that it was too soon to ‘shout victory’ on inflation, citing economic uncertainties and the possible impact of rising wages on price pressures,” reported the Business Recorder. The report also noted Lagarde “pushed back against market bets of rate cuts as early as April, joining other ECB officials in signaling that borrowing costs would ‘likely’ only start coming down in the summer – and if the latest economic data supported such a move.”
Given the slower-than-expected response to cutting interest rates, global markets have stumbled to start 2024. The ECB president’s comments have corroborated with economists from investment firms like Citi, which also doesn’t expect rate cuts to happen quickly and swiftly.
“We continue to believe that a shortening of the policy horizon of the ECB increases the relevance of its own inflation projections for policy decisions … so long as the ECB projects 2025 inflation above 2%, we expect resistance to rate cuts to remain strong,” Citi economists noted per a Reuters report.
“Once those projections fall below 2%, we expect pressure to ease policy to become irresistible … we expect this will be the case in June, but not earlier,” the report added.
2 Ways to Play Fed, ECB Moves
Given the effect one central bank has on the other’s market and vice versa, U.S. and European equities present traders with options. For the latter, consider the Direxion Daily FTSE Europe Bull 3X ETF (EURL) and the former, the Direxion Daily S&P 500® Bull 3X Shares ETF (SPXL).
EURL tracks the FTSE Developed Europe All Cap Index (ACDER), which measures the equity market performance of large-, mid- and small-cap companies in developed markets in Europe with 300% exposure. Like EURL, SPXL seeks daily investment results equal to 300% of the daily performance of the S&P 500 Index.
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