Stocks Rally On Fresh Hints About A Coming Pause In Rate Hikes

Stocks Rally On Fresh Hints About A Coming Pause In Rate Hikes
Stéphane Renevier, CFA

10 months ago2 mins

What happened?

The Bank of England (BoE) raised interest rates by half a percentage point to 4% – its highest since the global financial crisis – and, like the US Federal Reserve, which hiked rates by a smaller amount the day before, hinted that after a long series of hikes, it might soon pause.

The European Central Bank (ECB) lifted interest rates by half a percentage point to 2.5% – also its highest level since the global financial crisis. But we might have to wait a bit longer for a pause, as the Bank almost guaranteed another, similar hike next month.

What does this mean?

Let’s not lie to ourselves: it’s not all sunshine and rainbows on that side of the Atlantic. These economies are unlikely to avoid a recession, previous hikes can still do significant damage, and core inflation might prove stickier than expected.

But there are reasons to breathe a sigh of relief: inflation has been finally inching lower, and that suggests that the UK and the eurozone might soon see the end of interest rate increases. Plus, we’ve seen some better economic data, lower energy prices, and a growth-inducing reopening of the Chinese economy. With the risk out of the way that the BoE and ECB might trash the party, the path looks a lot better for stocks – at least in the short term.

Why should you care?

US stocks seem to be getting most of the attention, but don’t ignore European and UK stocks if you’re bullish. As you can see in the chart, they’ve outperformed their US peers over the past few months. And with their fundamentals improving, their central banks taking a slow-and-steady approach to hiking, their valuations still screening attractive, and the fact that they’re still benefiting from strong inflows, they can capably compete with US stocks for a place in your portfolio. To invest in their shares, consider the Vanguard FTSE Europe ETF (ticker: VGK; expense ratio: 0.08%) and the Franklin FTSE United Kingdom ETF (FLGB; 0.09%).



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