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

The STOXX Europe Index 600 closed the week slightly lower, despite good news on the European Union (EU) Recovery Fund. The ongoing geopolitical tensions with US/China continued to make headlines, alongside news that increasing coronavirus cases are no longer limited to the southern US states and continued evidence of job losses globally. US equities overall outperformed their European counterparts last week, but the S&P 500 Index still closed lower. The Asia Pacific (APAC) region fared even better, with equities generally closing higher there. In addition to the aforementioned bigger-picture themes, earnings season continued in both the United States and Europe, driving some outsized individual stock moves.

COVID-19 Update: Second-Wave Fears

The COVID-19 threat remains as the number of cases and deaths continues to climb in the United States. Last Friday saw the second-highest daily count of cases (77,848) and the number of deaths was higher than 1,000 for the fourth day running. This is no longer something we are only seeing in the United States, as new cases in Germany increased by the most in a month last Friday. In Spain, 281 active outbreaks have been identified and the Catalan government has re-introduced confinement rules in a dozen municipalities, including Barcelona. With this, France once again closed its border to Spain and the United Kingdom has reintroduced 14-day quarantine rules for those travelling back from Spain.

Unsurprisingly, the travel and leisure space underperformed in Europe last week and is the worst-performing sector at the start of this week. The impact of lockdowns on job losses was evident last week, with concerning figures from both the eurozone and the United States.

US data showed that jobless claims rose for the first time since late March. The continued rise in cases and the disruption accompanying lockdowns suggests it will be some time before we see improvement anywhere. US airline earnings released last week suggest that the recovery stalled in July as COVID-19 cases rose and individual states imposed quarantine measures.

EU Recovery Fund: Agreement Reached

After a marathon five-day EU summit, in the early hours of last Tuesday an agreement was made on the EU Recovery Fund in what French President Emmanuel Macron called an “historic day for Europe”.

The final agreement does not deviate drastically from the original proposal from the European Commission and offers a crucial demonstration of solidarity from member states. Leaders also signed off on the EU’s next seven-year budget, which will be worth €1.074 trillion.

A few changes were made in order to appease those member states who had been reluctant to agree to the measures as they stood:

  • The €750 billion fund will now be made up of €390 billion in grants (as opposed to the initial proposal of €500 billion) and €360 billion of loans (vs. €250 billion proposed) in order to appease the so-called “frugal four” countries: Denmark, the Netherlands, Austria and Sweden.
  • Member states also agreed to boost the budget rebates that the more fiscally conservative countries will receive on their contributions. Denmark, the Netherlands, Austria and Sweden will get more than €50 billion in rebates over seven years. Recently, countries (led by France) had pushed for the abolition of rebates after Brexit. Macron said that retaining the rebates was the price of securing a deal. German Chancellor Angela Merkel said the decision to raise them was “painful, but necessary”.
  • A mechanism has also been agreed upon by which any country can raise concerns if they believe another is not honouring the promises made to reform their own economy. This would lead to a temporary halt of transfers of EU recovery money by Brussels, with a three-month time limit to address any complaint.

The recovery fund will be distributed according to relative country sizes, as well as the severity of the COVID-19 impact experienced. With this, Italy stands to be the biggest beneficiary from the plan and expects to receive about €82 billion in grants and about €127 billion in loans, according to initial estimates.

Over the weekend, the Italian Treasury said that it does not see any “critical issue” for the country’s budget as its cash availability is developing in line with forecasts, and expects to have ~€80 billion in cash by the end of July.

European equities moved higher last week on the back of the announcement, with the European banks rallying. The magnitude of the rally was somewhat limited, however, given that an agreement at least by the end of the month was largely priced in ahead of the summit.

Gains in European equities did not manage to hold, pared later in the week on US/China and COVID-19 headlines. Bank stocks also faded to close the week lower after reports that the European Central Bank (ECB) is considering asking banks to suspend dividends at least until the start of 2021. There had been some hopes that dividends would be able to resume sooner. Following the announcement, the euro closed the week up 2% vs the US dollar.

Week in Review


European equities were well supported at the start of the week on the back of the EU Recovery Fund news. While the agreement was expected, so much of the news was already priced in; nonetheless, equity markets moved higher on the  confirmation and by midday on Tuesday the STOXX Europe Index 600 was up 2%. However, the gains couldn’t hold and the market finished lower by the end of the week.

Germay’s  DAX Stock Market Index outperformed last week whilst the FTSE 100 Index was weak, possibly a result of a lack of progress in Brexit negotiations.

The purchasing managers indices (PMIs) were the most notable data points last week, with Germany’s readings better than expected. However, this growth comes on the back of the worst contraction since World War II. French PMIs also surprised to the upside, and the UK figure returned to expansion. UK retail sales in June bounced back to higher than levels seen a year ago.

The  Citi Economic Surprise index for Europe moved back to positive levels and the highest level since 2017. The eurozone PMI report also showed that job losses in the manufacturing space remained severe, at increased levels vs. 2009. The backlog continued to fall despite a pickup in orders, suggesting we won’t see an increase in employment any time soon.

In terms of sectors, automobiles outperformed last week, helped by a strong earnings report from Daimler. Meanwhile, travel and leisure, the year-to-date underperformer, lagged again  as sentiment shifted on travel in Europe amid the rise in the number of infections in Germany, France, Italy, Spain and the United Kingdom.

United States

US markets closed last week lower across all major indices as COVID-19 cases continued to rise and tensions with China ramped up. The S&P 500 Index was fairly resilient and only suffered a small setback whilst the US Nasdaq Index underperformed, closing the week down 1.5%.1

Looking at sectors, the technology names were the underperformers for a second week as investors continued to take profits, which possibly explains the underperformance in the US Nasdaq.

We’ve talked about it a number of times before, but as US equities continue to outperform Europe (for now), it’s worth another reminder that the  “big five” tech names of Facebook, Amazon, Apple, Microsoft and Google dominate the S&P 500 Index, accounting for around 24% of the market capitalization.2 These five stocks have returned 35% year-to-date, whilst the other 495 stocks have declined by 5%.3 This plays into the profit taking we have seen in the technology space in the past two weeks.

This Thursday will be a big day for Apple, Amazon and Alphabet (Google) as they announce their earnings.

We already mentioned COVID-19 cases in the United States and the detrimental impact on the job market. It is worth noting, however, that for a market that seems to be craving more stimulus, lackluster macro data can also have the “bad news is good news” effect—something to keep in mind in the context of upcoming data releases.

On Thursday, second quarter 2020 gross domestic product (GDP) will be released following the Federal Open Market Committee (FOMC) monetary policy meeting and press conference on Wednesday. There is no change in interest rates expected at the meeting, but further policy support is  thought to be under consideration in the wake of continued COVID-19 economic impacts.

Focusing on the geopolitical backdrop, tensions flared towards the end of last week after the US State Department ordered the Houston Chinese consulate to “protect American  intellectual property and Americans’ private information,” citing suspicions of espionage close to its consulate in the southwestern city of Chengu.1 China quickly retaliated and ordered the United States to close this consulate.

We also heard some combative language from US Secretary of State Mike Pompeo about China. Pompeo had been in the United Kingdom and praised the UK Government’s tougher stance on China as the transatlantic allies signalled they are planning more coordinated action against Beijing.

There was some attempt to de-escalate tensions, however, as US President Donald Trump ruled out issuing further sanctions on other top Chinese officials for now.


Last week  was mixed for equities in the APAC region, with Hong Kong’s equity market the underperformer after recording its highest number of confirmed COVID-19 cases. We also saw a number of profit warnings in the Hong Kong consumer space, which weighed on sentiment.

South Korea’s market was the outperformer, gaining ground last week.

China’s clashes with the United States weighed on markets globally (as we’ve already touched on) causing markets to pare gains made earlier in the in the week. UK Foreign Secretary Dominic Raab spoke at a press conference following discussions with Pompeo, where Raab suggested further action against China may follow at the forthcoming G7 meeting, which has been delayed until “at least September 2020” given the pandemic.

Also last week, India moved to restrict Chinese companies from bidding for government contracts after a fatal brawl which occurred at the disputed Himalayan border, citing concerns over national security. The clash also escalated concerns over a growing trade deficit.

The Week Ahead

The focus this week, even in Europe, will be on the US Federal Reserve’s (Fed’s) interest-rate announcement Wednesday and the press conference with Chair Jerome Powell that follows. New policy announcements appear unlikely, with any changes more likely to come in September. There is no imminent requirement to change current policy at this time, but many observers expect Powell to lay the foundations for the next steps.

Recent communication from the Federal Reserve has suggested that further policy support in the coming months is under consideration.

On the data front, eurozone and US GDP will be in focus. Aside from that, corporate earnings releases will likely dominate market action. Thursday is a big day as Apple, Amazon and Alphabet (Google) announce their earnings.

Monday 27 July

  • Data: Germany: (Jul) IFO Institute for Economic Research; eurozone: (June) M3 money supply; Japan: (May) all industry activity; US: (July) durable goods orders

Tuesday 28 July 

  • Data: US: (July) consumer confidence, (July) Richmond Fed Manufacturing

Wednesday 29 July   

  • Economic/Political: FOMC interest-rate announcement and press conference
  • Data: France: (July) consumer confidence; UK: (June) mortgage applications, M4 money supply; US: Department of Energy (DOE) data, (June) pending home sales; Japan: (June) retail sales

Thursday 30 July

  • Economic/Political: ECB publishes economic bulletin
  • Data: Germany: Second quarter (Q2) GDP, (July) unemployment, (July) consumer prices index (CPI); eurozone: (June) unemployment, (Jul) economic survey; Italy: (June) unemployment; US: (Q2, Advance) GDP, initial jobless claims;

Friday 31 July

  • Economic/Political: Germany’s sovereign debt to be rated by Moody’s
  • Data: eurozone (Q2) GDP, CPI; France: (Q2) GDP, (July) CPI; Italy: (Q2) GDP, (July) CPI, (June) retail sales; US (June) personal income and spending; Japan: (June) industrial production, (June) jobless rate; China: (July) NBS manufacturing and non-manufacturing PMI

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1. Indices are unmanaged and one cannot 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: Bloomberg, as at 24 July 2020.

3. Past performance is not an indicator or guarantee of future results.

4. Source: Financial Times, “US orders China to close its Houston consulate”, 22 July 2020.

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