Beyond Bulls & Bears


Notes from the Trading Desk – Europe

Franklin Templeton’s Notes from the Trading Desk offer 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.

The Digest

Equity markets were higher across the board last week. The US market outperformed, with the S&P 500 Index up 4%, whilst the Stoxx Europe Index 600 600 gained 2%.1 This follows outperformance from European equities in June. Markets in the Asia Pacific (APAC) region were also broadly higher, with the exception of Japan, which closed down. Improving macro data helped push equities on through the latter half of the week, with the focus on global purchasing managers indices (PMIs) and the US employment report.

Risks remain, with COVID-19 cases continuing to rise across key US states forcing local governments to reverse lockdown easing. Cases in Brazil also continue to spike, but the market has seemingly ignored the rise in cases for now. US/China tensions are also on the rise, but equities are taking things in stride so far. At the start of this week, we saw a strong session in the APAC region spilling into a European market rally. Chinese state media appear to be pushing the case for a bull market to retail investors, and it looks as though equities received the message loud and clear.

We came to the end of the first half of 2020 last week, and what a six months it has been! It would take far too much time to go over all the interesting and volatile days and weeks we have seen throughout the period, so we thought we would recap a few key themes before looking at where the market might go from here.

Improving Macroeconomic Data Gives Cyclicals a Chance in June

Economic data in developed markets continued to improve in June. Whilst we are not seeing all-time highs as in the United States in terms of positive macro surprises, the euro area seems to have now troughed and has reverted sharply.

We saw value and cyclical names try to stage a rally earlier in the quarter and whilst the trend did not manage to hold at the time, we have now seen more positive macro in June, with particular focus on the turnaround in PMI data. Second quarter gross domestic product (GDP) for the euro area was also revised higher by a number of analysts, May unemployment data for the region was not as bad as feared. With this, European cyclicals continued to outperform defensive names in June, with financials and technology leading. Italian Banks outperformed in particular, helped by progress in the European Union (EU) recovery fund. The well-liked health care space was one of the month’s losers as the pickup in European economic momentum drew focus, along with travel & leisure as restrictions continued to weigh on stocks in the space.

First Half 2020 Sector Divergence

Looking at the first half of 2020 as a whole, the sector divergence in Europe is impressive, in our view. The two clear (and expected) outperformers through all of this have been technology and health care. The defensive utilities sector saw a muted decline. Looking at the other end of the spectrum, travel & leisure stocks were undoubtedly the losers, impacted dramatically by the pandemic, followed by banks  and oil & gas.

Europe vs. United States

Alongside the improving economic landscape, Europe is also benefitting from sizable fiscal and monetary policy. The (albeit yet to be finalised) European recovery fund is juxtaposed with the threat of a fiscal cliff in the United States, whilst a relatively stable reduction in new COVID-19 cases for Europe comes alongside new all-time highs in cases in the United States. There is also political uncertainty in the United States to consider as the upcoming presidential election looms. With all of this, we saw European equities outperform their US counterparts in June.

What to Look Out for in the Second Half in Europe

Whilst there will be other global catalysts—including the US presidential election in November—these are the three big themes which we think will drive European markets:

  • European Recovery Fund: As discussed, the European recovery fund is still to be ratified. Any progress here will be a positive, but there remains downside risk as some member states drag their feet.
  • Brexit: With the extension deadline now passed, 31 December is the date. Negotiations are difficult and ongoing.
  • COVID-19: We remain in uncharted territory as economies come out of lock down and attempt to control second spikes. Whilst Europe is faring better than other regions so far, sizable risks remain, and the ultimate economic impact and its reach remain unknown.

Week in Review


European equities performed well overall last week, with the Stoxx Europe Index 600 closing up 2.0%. Signals around progress in Brexit negotiations were mixed. The two sides are still way off an agreement but both parties remain hopeful some form of deal can be agreed before year end.

Macro data continued to improve, with final eurozone June PMIs revised higher across all three readings (manufacturing, services and composite). This suggests strong monthly GDP improvements will likely be seen for May and June. The German DAX Stock Market Index increased 3.6%, continuing its relatively good form as investors look to China proxies in Europe. The FTSE 100 Index was the week’s laggard, closing flat, with the pound up 1% against the US dollar through the week, muting gains in the exporter-heavy index. In terms of sectors, travel and leisure led the way, up 4.5%, as sentiment improved on mobility around Europe this summer. However, we would note that this outperformance in the space comes from a very low base. Health care stocks lagged on the week, up just 0.4%.

It seems appropriate to give further mention to Brexit negotiations given that we have now passed the deadline for any extension of the transition period. We now expect negotiations to intensify as both parties seek agreement before the European Council meeting on 15-16 October. Reports suggest there is a way to go before a deal can be reached with German Chancellor Angela Merkel, who said that her government is preparing itself for a no-deal Brexit. Issues which remain the focus include the Irish border, open and fair competition on trade and labour markets, the future role of the European Court of Justice in the United Kingdom, and the fisheries. The next round of weekly Brexit talks takes place from today in London, so we can expect further headlines this week.

United States

US equities put in a strong showing last week, with the improving macro picture on a holiday-shortened week buoying markets. The S&P 500 Index closed up 4% and the Nasdaq Index was up 5% last week. The release of the June employment report was the key focus as investors sought further information about the state of the US labour market amid emergence from the COVID-19 crisis. Markets were not disappointed, with the report coming in ahead of market expectations, showing a rise of 4.8 million non-farm payrolls in June.

In terms of sectors, communications services and real estate investment trusts (REITs) led the way last week, while the year-to-date (YTD) underperformers, financials and energy, lagged.

Whilst the US economy appears to be showing signs of a sharp recovery, news reports indicate that the fight against COVID-19 is certainly not over in the United States.

Digging a bit deeper into last week’s jobs report, the employment in the leisure and hospitality industry rose by 2.1 million in June, whilst retail jobs rose by 740,000. After the release, President Donald Trump said that the US economy is “roaring back” and that “it’s coming back extremely strong.” Whilst the latest report does show an impressive increase and a faster rebound than many had anticipated, it does come after a colossal drop of 20.8 million payrolls in April.

Meanwhile, infection rates appear to be continuing to rise in some key US states. On Saturday, Florida and Texas marked Independence Day on Saturday with record numbers of new daily infections. There have been some reversals in terms of easing measures, with Texas now imposing mandatory face coverings. Despite the reports, Trump remains in bullish mood, stating that the US strategy in managing the virus is “moving along well” before tweeting that infection rates only appear to be rising because of “massive testing”.

Despite Trump’s optimism, the virus still remains a very real threat to the health of the American people and to the strength of the US economy.

US-China trade relations also remain a key risk to market sentiment. Whilst it was a relatively quiet week in terms of trade developments, the focus appears to have shifted to tightening regulations to manage relations. Last week, the US Federal Communications Commission officially designated Chinese telecoms companies Huawei and ZTE as threats to national security. Also, the Wall Street Journal reported that Nuctech, China’s largest producer of security-screening equipment, was also in the crosshairs of the US government.2 China’s increased control over Hong Kong also remains in focus as the US government imposed new sanctions on banks which do business with Chinese officials.


Asian markets marched ahead last week, with the MSCI Asia Pacific Index closing up 1.75%. The Shanghai Composite led the way, up 5.8%, with sentiment seeing a massive shift through the week despite a number of headwinds remaining. Interestingly, Hong Kong’s Hang Seng Index traded up 3.4% despite turmoil in  Hong Kong. Japan’s Nikkei Index declined after a series of poor macro reports. In terms of sector moves around Asia, communication services was the top performer year-to-date last week whilst health care lagged behind.

A series of supportive headlines pushed Chinese equities higher last week. On Monday, it was reported that Chinese industrial profits had posted their largest gain in nearly a year, bucking a trend of losses which had lasted six months. On Tuesday, we saw Chinese PMIs surprising to the upside, with production, new orders and new exports also improving markedly. On Wednesday, we saw a report that manufacturing activity also improved in June, with new orders up for the first time since January. On Friday, the Chinese services sector reported a surge to a 10-year high in June in the aftermath of lockdown easing. This improving macro picture comes whilst China appears to have managed new COVID-19 cases down to a relatively low base, signalling that lockdown measures have worked there.

However, it was quite a different story for Japan last week. On Tuesday, we saw a report showing Japanese industrial production fell sharply whilst the country’s unemployment rate hit a new three-year high. On Wednesday, the release of Japanese manufacturer confidence showed a fall to its lowest level in since 2009. Also, COVID-19 infections remain at precarious levels and continue to trend higher. On Thursday, Tokyo reported 70 new cases, its highest number of infections since the state of emergency was lifted on 25 May.

Asian markets were very strong once again as we kicked off this new week of trading, with the Shanghai Composite reaching a new 2-½ year high. The move came on good volume too, the highest market turnover since 2015. Investors seemed to embrace a frontpage headline in the state-run Securities Times states which said a “healthy” bull market is important in the aftermath of the COVID-19 pandemic.

Week Ahead

The United Kingdom will be in focus as Brexit negotiations continue and as Chancellor of the Exchequer Rishi Sunak lays out his latest stimulus plan. The Eurogroup meets on Thursday, with finance ministers voting for the next president.

On the data front, we have German May industrial production (IP) released on Tuesday. In April, IP fell 17.9% month-on-month, which reflected declines of 22% month-on-month in manufacturing, 4.1% month-on-month in construction and 6.2% month-on-month in energy production. The IP report was weak and in line with expectations, but it nevertheless reinforced the sense of upside risks.

Looking ahead, we already know from the Verband der Automobilindustrie (VDA) data on improved car production in May, and both German manufacturing PMI and IFO data for May pointed to further signs of improvement. So, a rise in IP seems likely.


Monday 6 July

  • Economic/Political: Brexit negotiations continue in London.
  • Data: Germany: (May) factory orders; Eurozone: (May) retail sales; US: (June, flash) Markit PMI Services

Tuesday 7 July

  • Economic/Political: Istat releases monthly economic note; Reserve Bank of Australia interest-rate decision; Malaysia interest-rate decision
  • Data: Germany: (May) IP; Global: (Jun) services & composite PMI; Switzerland: (June) foreign currency reserves; Italy: (May) retail sales; US: (May) JOLTS job openings

Wednesday 8 July   

  • Economic/Political: UK’s Rishi Sunak lays out stimulus plan, US Federal Reserve’s (Fed’s) Bostic speaks
  • Data: France: (Jun) Bank of France industrial sentiment; United States: Energy Information Administration crude oil inventory report; Japan: (Jun) core machine orders China: (Jun) consumer price index, producer price index (PPI)

Thursday 9 July

  • Economic/Political: Eurogroup presidential vote, US Fed’s Raphael Bostic speaks (again)
  • Data: Germany: (May) trade balance; United Kingdom: (Jun) RICS house prices; US: initial jobless claims; Japan: (June) PPI

Friday 10 July

  • Economic/Political: Italy Sovereign debt to be rated by Fitch; Riksbank publishes minutes from its June meeting
  • Data: France: (May) industrial production; Italy: (May) industrial production; US: (June) PPI final demand

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1. Indices are unmanaged and one cannot directly invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.

2. Source: Wall Street Journal, “U.S. Presses Europe to Uproot Chinese Security-Screening Company,” 28 June 2020.