Beyond Bulls & BearsBeyond Bulls & Bears http://global.beyondbullsandbears.com Perspective From Franklin Templeton Investments Fri, 22 Jul 2016 08:46:25 +0000 en-US hourly 1 https://wordpress.org/?v=4.5.3 Three Things Markets Have Shown Us Since the Brexit Vote http://global.beyondbullsandbears.com/2016/07/21/three-things-markets-have-shown-us-since-the-brexit-vote/ http://global.beyondbullsandbears.com/2016/07/21/three-things-markets-have-shown-us-since-the-brexit-vote/#respond Thu, 21 Jul 2016 16:20:50 +0000 http://global.beyondbullsandbears.com/?p=14678 Ticker_Board_Leading

Although the result of the UK European Union referendum came as a surprise to markets, the subsequent response to the outcome has played out largely as many commentators expected. Initial volatility quickly gave way to a more considered approach from markets around the world. Still, the tumultuous events of recent days have given investors plenty of food for thought. Here, three of our investment professionals share the lessons they have learnt since the Brexit vote on June 23. Markets Are Likely to Take a More Cautious Approach to Political Events in the Future Robert Mazzuoli Portfolio Manager Franklin Local Asset Management, European Equities Traditionally, investors have tended to take the view that in uncertain political situations, such as Brexit, voters would steer clear of the generally perceived worst outcome. What the unexpected Brexit result suggests is that for future political events, markets are likely to take a more cautious approach in the run-up to voting. We’d expect to see this new approach reflected later this year ahead of both the Italian referendum on reforming its senate, which is scheduled for October and, of course, the US presidential election in November. In both of those instances, we imagine markets will be less likely to write off the worst-case scenarios occurring, and we thus could see a higher risk premium in markets ahead of both those events. Still, while the result itself was a surprise, the subsequent reaction of markets to the Brexit vote has been largely by the playbook. Once the indiscriminate selling that characterised the immediate response wore off, there was a period of sobering up, liquidity improved and by the middle of the week, markets had experienced something of a technical rebound. We think the market’s by-the-book response to the Brexit vote may have opened up some opportunities for prudent, long-term investors. First, several global companies based in the United Kingdom—but with largely international operations—were caught up in the initial, indiscriminate selling, despite the fact they might actually benefit from the translation effect of a weaker pound on overseas revenues and hence profits. The other opportunity, perhaps less obvious, may come from looking at the effect of how equity markets outside the United Kingdom moved after the Brexit vote. Some investors may be surprised to note that the European stock markets that suffered most in the immediate aftermath of the Brexit vote were not in the United Kingdom, but were in Spain and Italy. This seems to suggest a fear that the United Kingdom’s departure could spell the end of the European Union (EU) project, leaving those countries much worse off. We don’t believe in that scenario, nor in the dissolution of the EU, and so the drop in Spanish and Italian equities provide an opportunity for long-term, bottom-up investors, such as ourselves, to invest in good quality companies at compelling valuations. The World Continues to Spin and Markets Should Get Through This–in Time Colin Morton Vice President UK Equity Team Franklin Local Asset Management I think there’s good reason to believe that, given time, markets will get through this period of uncertainty and volatility. It may take some years, but through that, UK companies should still be trading with Europe and it should be, to some extent, business as usual. That’s not to say there won’t be upheavals, shocks to the UK economy and possibly economic slowdown. But taking a long-term view, we believe market fundamentals indicate a good buying opportunity in some of the hardest-hit areas, if you’re willing to be patient and take that risk on board. Post-Brexit conditions may give investors the chance to buy shares of some pretty good businesses at prices that are, in some cases, around 30% below where they were only a few days previously. Of course, many of these companies are operating in areas of the market that are out of favour at the moment, like house-building or residential and commercial property. However, we think there already seems to be a lot of bad news priced into some of these companies if you’re willing to look through the likely volatility of next three to six months and take a longer term perspective. The strength of the housing market is an important concern for UK politicians and economists. Between them, the housing market and the retail sector account for around 70% of the UK economy. A decline in confidence in the housing market and the knock-on effect on retailers and manufacturers would be a big negative for the UK market as a whole, and a slowdown would likely dent government revenues. So it seems possible to us that the UK government or the Bank of England might step up to offer some support if necessary. Over the last five years, we’ve seen the UK government behaving pragmatically and in ways designed to be supportive of the housing market, with policies including the Help to Buy scheme. If the UK housing market starts to fall more sharply than the government would like, ministers might propose some policy action to provide further support. Some Sectors Are Ignoring the Brexit Vote and Continuing to Focus on Fundamentals Dylan Ball, ACA Executive Vice President  Templeton Global Equity Group As investors, my team and I look for asymmetric risk—investments that we believe have more upside than downside potential. After the initial shock apparent in the days immediately after the vote, global markets showed signs of settling down by the middle of the following week. Within days, market volatility was actually back down to levels seen before the Brexit vote and sterling had recovered somewhat. In the days since the Brexit vote, opportunities in the energy and health care sectors, which tend to be dominated by large-cap multinational names, have been on our radar. Energy and health care stocks were largely unaffected by the vote as investors stayed focused on investment fundamentals within the two sectors. Meanwhile, we have also been working through our assumptions on European financials. We feel lower gross domestic product (GDP) growth...

The post Three Things Markets Have Shown Us Since the Brexit Vote appeared first on Beyond Bulls & Bears.

]]>
Ticker_Board_Leading
Download PDF

Although the result of the UK European Union referendum came as a surprise to markets, the subsequent response to the outcome has played out largely as many commentators expected. Initial volatility quickly gave way to a more considered approach from markets around the world. Still, the tumultuous events of recent days have given investors plenty of food for thought. Here, three of our investment professionals share the lessons they have learnt since the Brexit vote on June 23.

Markets Are Likely to Take a More Cautious Approach to Political Events in the Future

Robert Mazzuoli

Robert Mazzuoli

Robert Mazzuoli
Portfolio Manager
Franklin Local Asset Management, European Equities

Traditionally, investors have tended to take the view that in uncertain political situations, such as Brexit, voters would steer clear of the generally perceived worst outcome. What the unexpected Brexit result suggests is that for future political events, markets are likely to take a more cautious approach in the run-up to voting.

We’d expect to see this new approach reflected later this year ahead of both the Italian referendum on reforming its senate, which is scheduled for October and, of course, the US presidential election in November.

In both of those instances, we imagine markets will be less likely to write off the worst-case scenarios occurring, and we thus could see a higher risk premium in markets ahead of both those events.

Still, while the result itself was a surprise, the subsequent reaction of markets to the Brexit vote has been largely by the playbook. Once the indiscriminate selling that characterised the immediate response wore off, there was a period of sobering up, liquidity improved and by the middle of the week, markets had experienced something of a technical rebound.

We think the market’s by-the-book response to the Brexit vote may have opened up some opportunities for prudent, long-term investors. First, several global companies based in the United Kingdom—but with largely international operations—were caught up in the initial, indiscriminate selling, despite the fact they might actually benefit from the translation effect of a weaker pound on overseas revenues and hence profits.

The other opportunity, perhaps less obvious, may come from looking at the effect of how equity markets outside the United Kingdom moved after the Brexit vote.

Some investors may be surprised to note that the European stock markets that suffered most in the immediate aftermath of the Brexit vote were not in the United Kingdom, but were in Spain and Italy. This seems to suggest a fear that the United Kingdom’s departure could spell the end of the European Union (EU) project, leaving those countries much worse off.

We don’t believe in that scenario, nor in the dissolution of the EU, and so the drop in Spanish and Italian equities provide an opportunity for long-term, bottom-up investors, such as ourselves, to invest in good quality companies at compelling valuations.

The World Continues to Spin and Markets Should Get Through This–in Time

Colin Morton, UK Equity Team

Colin Morton

Colin Morton
Vice President
UK Equity Team
Franklin Local Asset Management

I think there’s good reason to believe that, given time, markets will get through this period of uncertainty and volatility. It may take some years, but through that, UK companies should still be trading with Europe and it should be, to some extent, business as usual.

That’s not to say there won’t be upheavals, shocks to the UK economy and possibly economic slowdown. But taking a long-term view, we believe market fundamentals indicate a good buying opportunity in some of the hardest-hit areas, if you’re willing to be patient and take that risk on board.

Post-Brexit conditions may give investors the chance to buy shares of some pretty good businesses at prices that are, in some cases, around 30% below where they were only a few days previously. Of course, many of these companies are operating in areas of the market that are out of favour at the moment, like house-building or residential and commercial property. However, we think there already seems to be a lot of bad news priced into some of these companies if you’re willing to look through the likely volatility of next three to six months and take a longer term perspective.

The strength of the housing market is an important concern for UK politicians and economists. Between them, the housing market and the retail sector account for around 70% of the UK economy. A decline in confidence in the housing market and the knock-on effect on retailers and manufacturers would be a big negative for the UK market as a whole, and a slowdown would likely dent government revenues.

So it seems possible to us that the UK government or the Bank of England might step up to offer some support if necessary. Over the last five years, we’ve seen the UK government behaving pragmatically and in ways designed to be supportive of the housing market, with policies including the Help to Buy scheme. If the UK housing market starts to fall more sharply than the government would like, ministers might propose some policy action to provide further support.

Some Sectors Are Ignoring the Brexit Vote and Continuing to Focus on Fundamentals

Dylan Ball

Dylan Ball

Dylan Ball, ACA
Executive Vice President 
Templeton Global Equity Group

As investors, my team and I look for asymmetric risk—investments that we believe have more upside than downside potential.

After the initial shock apparent in the days immediately after the vote, global markets showed signs of settling down by the middle of the following week. Within days, market volatility was actually back down to levels seen before the Brexit vote and sterling had recovered somewhat.

In the days since the Brexit vote, opportunities in the energy and health care sectors, which tend to be dominated by large-cap multinational names, have been on our radar. Energy and health care stocks were largely unaffected by the vote as investors stayed focused on investment fundamentals within the two sectors.

Meanwhile, we have also been working through our assumptions on European financials. We feel lower gross domestic product (GDP) growth across the EU region will likely lead to lower lending and a possible uptick in non-performing loans. We are conscious that rising systemic risk and an attendant rise in funding costs could inhibit the progress of some UK financials towards a more normal environment.

Although our base case is for lower near-term GDP growth in the United Kingdom, we believe the United Kingdom’s position as Germany’s third-largest export market should mean a modus vivendi between the United Kingdom—the world’s fifth-largest economy—and the eurozone.

Like most commentators, we believe there will likely be additional monetary assistance from European and UK central banks, but we think the market may be overlooking fiscal levers that governments around the world could pull, particularly outside Europe.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Beyond Bulls & Bears blog.

For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

The post Three Things Markets Have Shown Us Since the Brexit Vote appeared first on Beyond Bulls & Bears.

]]>
http://global.beyondbullsandbears.com/2016/07/21/three-things-markets-have-shown-us-since-the-brexit-vote/feed/ 0
What Next for Europe and the UK as an Italian Referendum Looms? http://global.beyondbullsandbears.com/2016/07/20/what-next-for-europe-and-the-uk-as-an-italian-referendum-looms/ http://global.beyondbullsandbears.com/2016/07/20/what-next-for-europe-and-the-uk-as-an-italian-referendum-looms/#respond Wed, 20 Jul 2016 17:17:20 +0000 http://global.beyondbullsandbears.com/?p=14645 Rome_Colosseum_Night_Leading

With the swifter-than-expected appointment of a new UK prime minister, investors might be hoping that the post-referendum uncertainty in the United Kingdom should be dying down. David Zahn thinks there should be cause for some optimism, notwithstanding the numerous challenges ahead. And, he has news for anyone who thought they’d heard the last of referendums in Europe this year. David Zahn, CFA, FRM Head of European Fixed Income Senior Vice President, Portfolio Manager Franklin Templeton Fixed Income Group The swift appointment of a new UK prime minster, just weeks after David Cameron’s post-referendum resignation, should be a positive sign for the United Kingdom. Markets don’t like uncertainty and the fact that Theresa May seems to have entered 10 Downing Street with a clear sense of direction should offer a strong message to markets. One of her clearest signals is her indication that there would be no backing down from the United Kingdom’s withdrawal from Europe, and her insistence that it’s her job to get the best deal for the country. We think that should help UK market sentiment. There remains some uncertainty about how negotiations will proceed, and we think there will have to be some give and take. But we believe some sort of deal will be struck because Europe needs the United Kingdom and the United Kingdom needs Europe. There has been a lot of talk of the United Kingdom adopting the Canadian, Norwegian or Swiss model for its relationship with the European Union (EU); we think the United Kingdom will do its own thing and go for its own model—likely to be a hybrid of several approaches. An important matter some people may have overlooked in considering why Europe needs the United Kingdom is defence. Not having the United Kingdom in the EU would likely weaken the EU’s military capability. The United Kingdom is one of the few countries in Europe that spends 2% of its budget on defence. Most other countries are well below that. So it’s possible that some kind of co-ordination in regards to defence could form an important component of negotiations. While much of the attention in the coming months is likely to be on the politicians, monetary policy is also likely to be an important pillar. We think government stability, a weaker currency and accommodative central bank should help minimise the economic repercussions of Brexit. So far, Bank of England (BOE) Governor Mark Carney appears to be very supportive of the markets. We’ve seen in a number of regions across the world where politicians are not as focused as they could be on the economy, and central banks have tended to step in. We would likely expect an economic slowdown in the United Kingdom, and the BOE is likely to have a plan to respond. However, we don’t think the BOE’s Monetary Policy Committee would want to cut rates too much further. Negative rates would not be as effective in the United Kingdom as in other regions, in our view, because so many people in the United Kingdom have mortgages tied to the BOE base rate. Is Italy Going to the Polls Too? Meanwhile, as the rest of the Europe reflects on the aftermath of the UK’s Brexit vote, another potentially disruptive referendum looms on the horizon: this time not on EU membership, but on the Italian constitution. After failing to get planned constitutional reforms through both houses of the Italian parliament with the required majority, Italy’s Prime Minister Matteo Renzi is expected to put his proposals to the country’s voters in a referendum. There’s no scheduled date for the vote yet, but it’s expected to take place during October/November. Significantly, Renzi has staked his political future on the referendum, saying he would resign if the vote goes against him. In terms of investor confidence, we believe it’s important to get more stable governments in Italy. Since the constitution came into force in 1948, the average administration lasts only about 13 months. So we consider any electoral reform that could promote increased stability to be a step in the right direction. But as we saw in the United Kingdom, referendums can be unpredictable beasts. Although electoral reform and the drive to get politics working more smoothly in Italy was one of the pillars of Renzi’s campaign to become prime minister, there have been signs of a shifting political mood among voters. The results of the recent local elections in particular saw an unexpected surge in support for the populist Five Star Movement. While not likely to have the impact of the UK’s EU vote, we think this potential referendum brings some uncertainty to the country and possibly further afield. Renzi is considered a reformer not just in Italy but also on the European stage, where he’s considered a strong leader. We feel Italy still has some way to go on the road to reform and if the reformer is out then observers may start to question whether the journey will continue. Renzi’s wider European role is likely to be especially important in the face of the German and French elections next year. If he were to fail, there’d be a chance that the eurozone’s three most powerful economies could have different leaders within a year. Significantly, we don’t think current Italian bond yields reflect the risk of Renzi’s failure, nor the challenging state of the country’s banking system. Right now the yield on the Italian 10-year government bond is 1.2%, which we consider low for the inherent political uncertainty. The market is likely to take some comfort from the European Central Bank’s ongoing buying programme, but it should also consider the weakness of the Italian banking system, which is seen as one of the least-capitalised banking systems in Europe. The Italian banking system is widely regarded as needing an injection of capital, but there are question marks over how that could be achieved. Under European Commission rules, any state support is likely to require subordinated debt holders to take a haircut,...

The post What Next for Europe and the UK as an Italian Referendum Looms? appeared first on Beyond Bulls & Bears.

]]>
Rome_Colosseum_Night_Leading
Download PDF

With the swifter-than-expected appointment of a new UK prime minister, investors might be hoping that the post-referendum uncertainty in the United Kingdom should be dying down. David Zahn thinks there should be cause for some optimism, notwithstanding the numerous challenges ahead. And, he has news for anyone who thought they’d heard the last of referendums in Europe this year.

David Zahn

David Zahn

David Zahn, CFA, FRM
Head of European Fixed Income
Senior Vice President, Portfolio Manager
Franklin Templeton Fixed Income Group

The swift appointment of a new UK prime minster, just weeks after David Cameron’s post-referendum resignation, should be a positive sign for the United Kingdom.

Markets don’t like uncertainty and the fact that Theresa May seems to have entered 10 Downing Street with a clear sense of direction should offer a strong message to markets.

One of her clearest signals is her indication that there would be no backing down from the United Kingdom’s withdrawal from Europe, and her insistence that it’s her job to get the best deal for the country.

We think that should help UK market sentiment. There remains some uncertainty about how negotiations will proceed, and we think there will have to be some give and take. But we believe some sort of deal will be struck because Europe needs the United Kingdom and the United Kingdom needs Europe. There has been a lot of talk of the United Kingdom adopting the Canadian, Norwegian or Swiss model for its relationship with the European Union (EU); we think the United Kingdom will do its own thing and go for its own model—likely to be a hybrid of several approaches.

An important matter some people may have overlooked in considering why Europe needs the United Kingdom is defence. Not having the United Kingdom in the EU would likely weaken the EU’s military capability. The United Kingdom is one of the few countries in Europe that spends 2% of its budget on defence. Most other countries are well below that. So it’s possible that some kind of co-ordination in regards to defence could form an important component of negotiations.

While much of the attention in the coming months is likely to be on the politicians, monetary policy is also likely to be an important pillar. We think government stability, a weaker currency and accommodative central bank should help minimise the economic repercussions of Brexit.

So far, Bank of England (BOE) Governor Mark Carney appears to be very supportive of the markets. We’ve seen in a number of regions across the world where politicians are not as focused as they could be on the economy, and central banks have tended to step in.

We would likely expect an economic slowdown in the United Kingdom, and the BOE is likely to have a plan to respond. However, we don’t think the BOE’s Monetary Policy Committee would want to cut rates too much further. Negative rates would not be as effective in the United Kingdom as in other regions, in our view, because so many people in the United Kingdom have mortgages tied to the BOE base rate.

Is Italy Going to the Polls Too?

Meanwhile, as the rest of the Europe reflects on the aftermath of the UK’s Brexit vote, another potentially disruptive referendum looms on the horizon: this time not on EU membership, but on the Italian constitution.

After failing to get planned constitutional reforms through both houses of the Italian parliament with the required majority, Italy’s Prime Minister Matteo Renzi is expected to put his proposals to the country’s voters in a referendum. There’s no scheduled date for the vote yet, but it’s expected to take place during October/November.

Significantly, Renzi has staked his political future on the referendum, saying he would resign if the vote goes against him. In terms of investor confidence, we believe it’s important to get more stable governments in Italy. Since the constitution came into force in 1948, the average administration lasts only about 13 months. So we consider any electoral reform that could promote increased stability to be a step in the right direction.

But as we saw in the United Kingdom, referendums can be unpredictable beasts. Although electoral reform and the drive to get politics working more smoothly in Italy was one of the pillars of Renzi’s campaign to become prime minister, there have been signs of a shifting political mood among voters. The results of the recent local elections in particular saw an unexpected surge in support for the populist Five Star Movement.

While not likely to have the impact of the UK’s EU vote, we think this potential referendum brings some uncertainty to the country and possibly further afield. Renzi is considered a reformer not just in Italy but also on the European stage, where he’s considered a strong leader. We feel Italy still has some way to go on the road to reform and if the reformer is out then observers may start to question whether the journey will continue.

Renzi’s wider European role is likely to be especially important in the face of the German and French elections next year. If he were to fail, there’d be a chance that the eurozone’s three most powerful economies could have different leaders within a year.

Significantly, we don’t think current Italian bond yields reflect the risk of Renzi’s failure, nor the challenging state of the country’s banking system. Right now the yield on the Italian 10-year government bond is 1.2%, which we consider low for the inherent political uncertainty. The market is likely to take some comfort from the European Central Bank’s ongoing buying programme, but it should also consider the weakness of the Italian banking system, which is seen as one of the least-capitalised banking systems in Europe.

The Italian banking system is widely regarded as needing an injection of capital, but there are question marks over how that could be achieved. Under European Commission rules, any state support is likely to require subordinated debt holders to take a haircut, but most of those creditors are retail investors so that would prove politically difficult in Italy.

In response, our strategy has been to lighten Italian exposure in favour of a more diversified portfolio of corporate credit across Europe. We think that in the so-called periphery eurozone countries, notably Spain and Italy, there remains a substantial chance that political events could create some volatility, and we don’t think investors are really getting paid for that at the moment.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Beyond Bulls & Bears  blog.

For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties.

The post What Next for Europe and the UK as an Italian Referendum Looms? appeared first on Beyond Bulls & Bears.

]]>
http://global.beyondbullsandbears.com/2016/07/20/what-next-for-europe-and-the-uk-as-an-italian-referendum-looms/feed/ 0
Notes from the Trading Desk – Europe http://global.beyondbullsandbears.com/2016/07/18/notes-from-the-trading-desk-europe-57/ http://global.beyondbullsandbears.com/2016/07/18/notes-from-the-trading-desk-europe-57/#respond Mon, 18 Jul 2016 17:08:42 +0000 http://global.beyondbullsandbears.com/?p=14602 Notes_from_the_Trading_Desk_Leading

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice. Monday, July 18, 2016 European equities posted solid gains over the course of last week, alongside the majority of global markets. US and Chinese economic data pointed towards signs of improvement in growth, while global central banks shifted in a more dovish direction since the Brexit vote. There are many reasons we can attribute to last week’s global cyclical risk-on rally. Bank of England Monetary Policy Committee Meeting The outcome of the much-anticipated Bank of England (BOE) Monetary Policy Committee (MPC) meeting on Thursday (July 14)—the first since Brexit—surprised the majority of market participants. The MPC voted 8:1 to leave interest rates unchanged, with only Gertjan Vlieghe voting for a 25 basis-point (bp) cut, despite markets pricing in a high probability of a 25bp cut to the 0.5% base rate. Following the announcement, we saw a sharp move higher in the pound against the US dollar. The meeting minutes, however, signalled that most BOE members expect a very different outcome in the next meeting (August 4). The main reason for the delay in easing rates was a desire to wait for the Inflation Report, which will be released on the same day as the next BOE meeting, so now focus turns to commentary leading up to August 4. On the back of the MPC meeting, BOE Chief Economist Andy Haldane said he would “rather run the risk of taking a sledgehammer to crack a nut” if there were doubts about the efficacy of monetary policy. This frank remark from a well respected BOE member saw the pound retrace further ground. We think this could be taken to suggest the central bank does not feel in any sense constrained in its ability to ease policy, or take any action required to support the UK economy, despite the low base rate. It appears to us to be more likely than ever that easing will start in August. In the ongoing whirlwind of the Brexit aftermath, Theresa May replaced David Cameron as UK prime minister after her rival dropped out of the leadership race. May wasted no time in appointing her cabinet, and the rapidity with which these new positions were announced helped last week’s equity rally, reducing some uncertainty over key positions in government. The new Chancellor of the Exchequer Philip Hammond stated that there would be no emergency budget, but that changes to fiscal policy would be announced in the Autumn Statement, likely in October. We start to see the beginnings of a move into the exposed midcap UK space with the FTSE 250 Index outperforming the FTSE 100 Index1 as recently chased US-dollar earners succumbed to some profit-taking due to the flux in currency. All in all, the FTSE 100 Index, FTSE 250 Index and the pound climbed last week. European Banks We saw a number of positive takeaways from the European banking sector last week. Firstly, Italian Prime Minister Matteo Renzi said on Monday (July 11) that a deal between Italy and the European Union (EU) was close. Media reports referenced talks between Italy and the European Commission over the recapitalisation of banks using taxpayer funds, which would leave creditors facing a loss. On top of this, German Chancellor Angela Merkel said she was confident of a good solution to Italy’s bank problems and does not see a European bank crisis brewing. We also heard from EU Competition Commissioner Margrethe Vestager who said that the EU is aware of the need to guard banks and personal savings, suggesting that fast-paced negotiations are underway to find a solution, before the results of the European Central Bank (ECB) stress test on July 29. Spanish banks were lifted after Advocate General Mengozzi of the EU Court of Justice gave a non-binding opinion that mortgage floor refunds would not be applied retroactively and capped at 2013. This will likely see the avoidance of around €3 billion in additional provisions which had been weighing on the sector. Europe An improvement in investor sentiment in Europe resulted in a strong week for European equities—a risk-on tone prevailed as a degree of political stability and hopes for heightened stimulus were solidified. Markets in Italy and Spain outperformed, driven by the rally in European banks. The European mining industry came out particularly strong last week as investors looked for US dollar exposure against a lower pound, while iron ore shipments from the world’s biggest bulk-export terminal in Australia surged to a record high. European markets sustained some losses on Friday (July 15) after the shocking Bastille Day attack in Nice, France. There was further geopolitical unrest on Friday night after an attempted military coup against Turkish Prime Minister Tayyip Erdogan. The immediate impact was felt with a sudden drop in the Turkish lira, but the currency has already made back more than half of those losses in early trading today (July 18). However, the Turkish equity market has seen significant declines. Americas Last week the US equity market had a strong start, as dovish Fed speak implying that we would see lower rates for longer, drove markets higher early in the week. June retail sales highlighted an improving economy, and stable consumer price index (CPI) came in higher. The improving data helped dampen global growth concerns, which saw US Treasury yields higher across the board, with the US dollar also gaining on the week. Asia Asian markets also enjoyed last week’s global rally, with Japan the standout outperformer, driven by renewed stimulation hopes after Japanese Prime Minister Shinzo Abe won a “super majority” of two-thirds of seats in the upper-house election. One of Abe’s first acts was for...

The post Notes from the Trading Desk – Europe appeared first on Beyond Bulls & Bears.

]]>
Notes_from_the_Trading_Desk_Leading
Download PDF

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

Monday, July 18, 2016

European equities posted solid gains over the course of last week, alongside the majority of global markets. US and Chinese economic data pointed towards signs of improvement in growth, while global central banks shifted in a more dovish direction since the Brexit vote. There are many reasons we can attribute to last week’s global cyclical risk-on rally.

The Digest

Bank of England Monetary Policy Committee Meeting

Bank_of_EnglandThe outcome of the much-anticipated Bank of England (BOE) Monetary Policy Committee (MPC) meeting on Thursday (July 14)—the first since Brexit—surprised the majority of market participants. The MPC voted 8:1 to leave interest rates unchanged, with only Gertjan Vlieghe voting for a 25 basis-point (bp) cut, despite markets pricing in a high probability of a 25bp cut to the 0.5% base rate.

Following the announcement, we saw a sharp move higher in the pound against the US dollar. The meeting minutes, however, signalled that most BOE members expect a very different outcome in the next meeting (August 4). The main reason for the delay in easing rates was a desire to wait for the Inflation Report, which will be released on the same day as the next BOE meeting, so now focus turns to commentary leading up to August 4.

On the back of the MPC meeting, BOE Chief Economist Andy Haldane said he would “rather run the risk of taking a sledgehammer to crack a nut” if there were doubts about the efficacy of monetary policy. This frank remark from a well respected BOE member saw the pound retrace further ground. We think this could be taken to suggest the central bank does not feel in any sense constrained in its ability to ease policy, or take any action required to support the UK economy, despite the low base rate. It appears to us to be more likely than ever that easing will start in August.

In the ongoing whirlwind of the Brexit aftermath, Theresa May replaced David Cameron as UK prime minister after her rival dropped out of the leadership race. May wasted no time in appointing her cabinet, and the rapidity with which these new positions were announced helped last week’s equity rally, reducing some uncertainty over key positions in government. The new Chancellor of the Exchequer Philip Hammond stated that there would be no emergency budget, but that changes to fiscal policy would be announced in the Autumn Statement, likely in October.

We start to see the beginnings of a move into the exposed midcap UK space with the FTSE 250 Index outperforming the FTSE 100 Index1 as recently chased US-dollar earners succumbed to some profit-taking due to the flux in currency. All in all, the FTSE 100 Index, FTSE 250 Index and the pound climbed last week.

European Banks

We saw a number of positive takeaways from the European banking sector last week. Firstly, Italian Prime Minister Matteo Renzi said on Monday (July 11) that a deal between Italy and the European Union (EU) was close. Media reports referenced talks between Italy and the European Commission over the recapitalisation of banks using taxpayer funds, which would leave creditors facing a loss.

On top of this, German Chancellor Angela Merkel said she was confident of a good solution to Italy’s bank problems and does not see a European bank crisis brewing. We also heard from EU Competition Commissioner Margrethe Vestager who said that the EU is aware of the need to guard banks and personal savings, suggesting that fast-paced negotiations are underway to find a solution, before the results of the European Central Bank (ECB) stress test on July 29.

Spanish banks were lifted after Advocate General Mengozzi of the EU Court of Justice gave a non-binding opinion that mortgage floor refunds would not be applied retroactively and capped at 2013. This will likely see the avoidance of around €3 billion in additional provisions which had been weighing on the sector.

Around The World


Around_the_World

Last Week

Europe

An improvement in investor sentiment in Europe resulted in a strong week for European equities—a risk-on tone prevailed as a degree of political stability and hopes for heightened stimulus were solidified. Markets in Italy and Spain outperformed, driven by the rally in European banks. The European mining industry came out particularly strong last week as investors looked for US dollar exposure against a lower pound, while iron ore shipments from the world’s biggest bulk-export terminal in Australia surged to a record high.

European markets sustained some losses on Friday (July 15) after the shocking Bastille Day attack in Nice, France. There was further geopolitical unrest on Friday night after an attempted military coup against Turkish Prime Minister Tayyip Erdogan. The immediate impact was felt with a sudden drop in the Turkish lira, but the currency has already made back more than half of those losses in early trading today (July 18). However, the Turkish equity market has seen significant declines.

Americas

Last week the US equity market had a strong start, as dovish Fed speak implying that we would see lower rates for longer, drove markets higher early in the week. June retail sales highlighted an improving economy, and stable consumer price index (CPI) came in higher. The improving data helped dampen global growth concerns, which saw US Treasury yields higher across the board, with the US dollar also gaining on the week.

Asia

Asian markets also enjoyed last week’s global rally, with Japan the standout outperformer, driven by renewed stimulation hopes after Japanese Prime Minister Shinzo Abe won a “super majority” of two-thirds of seats in the upper-house election. One of Abe’s first acts was for ministers to begin compiling a new stimulus package, with some reports suggesting it may amount to more than ¥10 trillion. Last week the Japanese yen suffered its worst week of losses since 1999, what we view as another sign of increased global risk appetite.

We also saw supportive macro data from China, as second-quarter gross domestic product growth came in at 6.7% (above estimates), while there are rumours of a potential reserve requirement ratio (RRR) cut from the People’s Bank of China in the fourth quarter. Australia also gained on the week with a solid pick-up in macro data and a resolution of recent inconclusive elections. Australian Prime Minister Malcolm Turnbull was finally declared the victor after eight days of vote counting.

Week Ahead

Politics

We will be closely watching the situation in Turkey as the ramifications of Friday’s coup attempt unfold. In Spain, parliament reconvenes this week after the election and focus will be on efforts to form a government. Finally, in the United States, media attention will fall on the Republican National Convention taking place this week (July 18-21).

Monetary Policy

The ECB will meet for a policy meeting on Thursday, July 21. Although the market does not expect a significant policy change, it will be interesting to see ECB President Mario Draghi’s commentary after the Brexit vote. In addition, given the narrowing basket of German Bunds eligible for its quantitative easing programme, it has been suggested the ECB could loosen the criteria for Bunds they can buy.

In the United States, the official Fed speak blackout period commences ahead of the July meeting (July 26-27).

Economic Data

A number of UK data points are on the calendar this week: CPI, unemployment, retail sales, and housing data, and  certainly, we think all eyes will be watching out for any impact from the referendum.

In the United States, it is a relatively quiet week in terms of macro data, with housing starts and existing home sales to watch.

Later in the week, Japan will release its all-industry activity index for May, while in China the main highlight will be June property prices.

Views You Can Use

Insight from Our Investment Professionals

Emerging Markets Q2 2016 Recap: Brexit Could Offer Silver Lining for Some

Mark Mobius

Mark Mobius

Mark Mobius outlines what’s happened in the emerging markets universe, and observes why emerging markets maintained an upward trend in the second quarter of 2016. Read More.

Mark Mobius observes the cultural and commercial attractions in Thailand, and explores the European kinship between Europe and Thailand. Read More.

Emerging Markets: Mapping the Opportunities

Michael Hasenstab

Michael Hasenstab

In the latest edition of “Global Macro Shifts,” the Templeton Global Macro team provides an in-depth evaluation of emerging markets that reminds us how each country handles its political and economic challenges will ultimately determine its viability. Here, CIO Michael Hasenstab offers an overview of the team’s views in this brief excerpt from the full research-based briefing. Read More.

Global Economic Perspective: July

Franklin Templeton Fixed Income Group

Franklin Templeton Fixed Income Group

June heralded a fresh downward leg in the pattern of falling US bond yields prevalent so far in 2016. Yields began moving lower early in the month, and the move was accelerated sharply following the unexpected decision by referendum voters in the United Kingdom. The Franklin Templeton Fixed Income Group offer their perspective on US bonds caught in the global trend of falling yields, as well as the effect of the UK referendum result on the global economy. Read More.

What an (Economic) Drag It Is Getting Old

Brooks Ritchey

Brooks Ritchey

Brooks Ritchey, senior managing director, K2 Advisors, looks beyond the day-to-day data and policy debates to a bigger-picture trend that could have important market and economic implications: the aging of the global population. Read More.

 

For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

Important Legal Information

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of July 18, 2016, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton Investments. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security.

Nothing in this document may be relied upon as investment advice or an investment recommendation.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

Links to External Sites

Franklin Templeton Investments is not responsible for the content of external websites.

The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).

Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.

1. Indexes are unmanaged and one cannot directly invest in them. Past performance is not an indicator or guarantee of future performance.

The post Notes from the Trading Desk – Europe appeared first on Beyond Bulls & Bears.

]]>
http://global.beyondbullsandbears.com/2016/07/18/notes-from-the-trading-desk-europe-57/feed/ 0