The impact of the Middle East protests has reverberated around the world, with a sudden spike in oil prices threatening to pull the globe back into a recession. While crude has soared here in the U.S., events have been even more dramatic in Europe where Brent crude, the benchmark for the EMEA region, has skyrocketed to near $117/bbl. due to North African disruptions. Elevated energy prices are now a major threat to the still-fragile recovery, threatening to pinch consumers and businesses across the continent.
As a result of the run-up in oil and inflationary pressures in other commodities as well, many economists believe that the ECB may be forced to hike rates sooner rather. For investors concerned about this scenario, today’s European Central Bank meeting in Frankfurt should help to shed some light on the situation and how Europe will proceed in coming weeks and months. While the European economy remains incredibly shaky and thus not exactly ready for a rate hike, it will be especially difficult for the central bank to hold off on raising rates given the bank’s single mandate to preserve price stability. After inflation hit 2.3% in January– slightly above the target of 2.0%–the continent’s central banks are no doubt feeling the heat.
While a hike could be welcomed news in some of the richer portions of Europe, it is likely to spark fears in more heavily indebted nations such as Spain. If rates are raised in the near term, it will necessarily lead to a jump in borrowing costs. Such a scenario could crush the extremely fragile market, which has made some progress in terms of trimming its debt but continues to show unemployment exceeding 20%.
Due to this key central bank meeting and Spain’s precarious financial situation, the iShares MSCI Spain Index Fund (EWP) should be active in today’s trading. The fund tracks the MSCI Spain Index, which measures the performance of the Spanish equity market and currently has 30 securities in total. In terms of sector allocations the fund is heavily weighted towards financials, which make up over 40% of EWP’s total assets. This is important to note because financials are often impacted by rate hikes; as a result, EWP could be in for an especially volatile day if the ECB announces any plans to its outlook for rates in the near term [see all the ETFs in the Europe Equities ETFdb Category].
Today could be a very important day for the Spanish ETF and could set the tone for the fund going into the next several weeks. After its rough times in 2010, EWP has managed to start 2011 on a high note, gaining just under 13% since the start of the year. However, over the last month, thanks to rising tensions in the Middle East and fears over an ECB rate hike, the fund has slumped back by about 3% [see more charts of EWP here].
If a rate hike is issued or if the ECB even hints at such a move in the near future, EWP may tumble on the day. If, however, the central bank declares the oil shock to be a supply issue and one that they should not be reacting to with a rate hike, it could produce a modest surge in EWP and continue the fund’s 2011 trend higher. Either way, look for EWP and other European ETFs to be in focus throughout Thursday’s session [see the Ten Worst Performing ETFs of 2010].
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Disclosure: No positions at time of writing.