NEW YORK ( ETF Expert) -- In a matter of hours, the European Central Bank as well as the People's Bank of China lowered key interest rates. For that matter, the Bank of England stepped up its bond-purchasing, quantitative easing program.
In the recent past, stimulative measures might have been seen as a positive for stocks of faltering economies. The measures might even have been viewed as a benefit to nations around the world that export their wares.
However, the initial reaction by foreign equity ETFs was rather uninspiring. For example, through the first half of Thursday's trading session last week, the Vanguard MSCI EAFE Index Fund (VEA) retreated by roughly -1.35%.
Granted, the U.S. Dollar Index (DXY) and its exchange-traded proxy, PowerShares DB Dollar Bullish (UUP), have a lot to do with poor performance in foreign markets. Most of the exchange-traded stock funds are not hedged for currency changes; in essence, a weakening euro and a weakening British pound adversely affected many foreign stock ETFs. Nevertheless, even the dollar-hedged DBX MSCI EAFE Currency Hedged Index Fund (DBEF) was down as much as a percentage point. It follows that currencies alone can not be blamed for a pullback in developed world stocks, particularly in Europe and the Far East. Some have suggested that the rate cuts can do little to inspire economic confidence in crisis-slammed Europe. There are those who believe the ECB will have to fire up their quantitative easing guns once more; in particular, the ECB may need to acquire extensive quantities of Italian and Spanish debt to push down Spain/Italy's costs of borrowing. For example, last month, Spain paid a rate of 6% for newly issued 10-year notes. Today, the auction witnessed 6.4% yields. Indeed, rates rose in spite of the fact that the eurozone bailout fund can (as of last week's EU summit) directly recapitalize struggling Spanish financial institutions. Looked at another way, certain ETFs are getting a lift from China's slowdown, England's need for QE and Europe's recession/debt crisis. In fact, many of those ETFs have been in the limelight for months. RePowerShares German Bund Futures ETN (BUNL) surged 0.7%. Long-term bonds via iShares 20 Year Treasury (TLT) rose 0.6% and U.S.-oriented mortgage REITs via iShares FTSE NAREIT Mortgage REIT (REM) pushed forward to hit yet another 52-week pinnacle.