Equity ETFs focused on Europe surged on Friday on an unexpectedly strong U.S. jobs report and on belated views that the European central bank’s commitment to support the eurozone’s economy might have teeth after all.
The $6.3 billion Vanguard MSCI Europe ETF (NYSEArca: VGK) was up more than 3.9 percent in early trade while the $867 million iShares S&P Europe 350 Index Fund (NYSEArca: IEV) was up 4 percent.
The rise came as the Dow Jones industrial average tagged on gains of some 1.7 percent following a better-than-expected jobs report, which pegged nonfarm job creation in July at 163,000 when the market expected 100,000 new jobs.
Germany, widely regarded as the strongest economy in Europe, was getting the biggest pop on Friday. The iShares MSCI Germany Index Fund (NYSEArca: EWG) rose 5.5 percent to $20.65 a share. The ETF’s top three sector allocations are consumers, materials and financials, at 18 percent, 15.75 percent and 14.71 percent, respectively.
The jobs news, while superficially encouraging, belied ongoing challenges the global economy still faces. For example, a separate survey from the U.S. government found that the unemployment rate ticked up 1 basis point to 8.3 percent. The rise suggested that people looking for work might be giving up.
Moreover, the eurozone’s ongoing struggles to definitively address its debt problems have been anything but decisive, which has roiled financial markets for three years now.
To the contrary, the narrative from the eurozone is a series of bold pronouncements, followed by protracted discussions that often yield results that fall far short of the initial pronouncements. Initial reactions to ECB President Mario Draghi's comments that the central bank would do what was necessary seemed to ring hollow earlier this week for some investors, who sent European shares lower.
That’s not to say the eurozone hasn’t been capable of bold strokes—the restructuring of Greek debt obligations serves as one shining example.
But the progress has come in fits and starts, creating just the sort of uncertainty that creates volatility in markets.
Across the Atlantic, Federal Reserve Chairman Ben Bernanke’s decision not to implement more quantitative easing, announced at the Fed’s last meeting, is looking a bit wiser just now given the relatively encouraging rise in employment in July.
The U.S. central bank will digest one more employment report before it holds its next policy meeting.
Our annual fixed-income conference is coming up in a little more than a week and I can’t wait.
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