With inflation hitting a record 8.1% in the eurozone, all eyes are on the European Central Bank (ECB) this week. Indeed, the ECB is now under pressure to bring inflation under control, and that means one thing: raising interest rates. With that in mind, how should you approach your investments this week?
Interest rates are going up
After ten years of historically low interest rates, currently between -0.5% and 0.25%, the ECB will decide whether to raise interest rates on Thursday, June 9th. So, what will be the direct impact? Bank loans and mortgage rates will increase, as well as business loans and other types of credit used by companies to grow. Raising rates is designed to decrease demand in the economy which should stabilise prices (and therefore bring down inflation).
However, there’s a fine balance here! The ECB doesn’t want to slow down the economy too much and lead the eurozone into recession. So it’s a question of getting the right dose of interest rates.
What’s happening with energy prices?
There’s only one problem with this strategy: the rise in energy prices triggered by the war in Ukraine. French economist Stéphanie Villers explains that inflation in energy prices is difficult to manage since the crisis is caused by actors outside the eurozone (Russia).
She compares this situation to the United States where inflation is more of an internal problem, because it is being powered by rising wages. Increasing rates in the US therefore has a bigger impact, according to her, because the price pressures are isolated within America.
**Average monthly electricity wholesale prices in selected countries in the European Union (EU) from January 2020 to February 2022
How to invest with this information?
These big economic decisions may have an impact on your portfolio. So what should you look for?
Major European banks will benefit from higher interest rates. BNP Paribas, for example, could generate even larger profits after an already record year in 2021 (profits were up by 19 % year-on-year).
You can also look at ETFs that protect you from inflation such as the USD Inflation-Linked Bonds ETF (Lyxor).
Don’t forget to diversify! You can also invest in ETFs that give you exposure to regions outside the eurozone, where they are less impacted by ECB decisions. For example, the All Country World Index (Xtrackers) or the All World Index ETF (Lyxor). Both are highly diversified baskets of stocks.
Finally, note that an increase in eurozone interest rates could strengthen the euro against the dollar.
Let’s change the subject from macroeconomics to technology! From June 6th – 10th we’ll see the return of the Apple Worldwide Developers Conference. During this five-day conference, Apple may announce some new products, including a new super-powerful iMac, or even a renewal of its MacBook range. Look out for new software developments, too.
Tuesday – US Trade Balance (April). Quarterly figures from United Natural Foods.
Wednesday – Trade balance in France and Austria (April). GDP growth and unemployment rate in the eurozone (first quarter). Industrial production in Ireland (April). SoiTec quarterly results.
Thursday – Inflation rates in the Netherlands and Ireland (May). ECB decision on interest rates. US weekly unemployment figures. NIO quarterly results.
Friday – Inflation rate in Spain (May). Industrial production in Italy (April). Inflation rate in the United States (May).
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We’ll be back next week with another edition of Market News. In the meantime, have a great week on the markets!
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.