Beyond Bulls & Bears


Notes from the Trading Desk – Europe

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.

The Digest

Equity markets treaded water last week, with a few factors giving investors cause for concern. In Europe, rising COVID-19 cases are weighing on sentiment, whilst the upcoming presidential election, delays over fiscal support, and some disappointment over the Federal Reserve’s (Fed’s) commentary at its latest policy meeting have all added to a “risk-off” tone in the United States. Overall market moves were muted, with the MSCI World Index unchanged last week, but there was some significant sector movement. The S&P 500 Index was down 0.6%, the Stoxx Europe 600 Index was up 0.6%, and the MSCI Asia Pacific Index was up 1.6%.1

Rising COVID-19 Concerns in Europe

Towards the end of last week, a key theme for equity markets was rising fears over the increase in COVID-19 cases and another wave of potential lockdowns that could follow. Cases continue to rise sharply in a number of countries, including France, Spain and the United Kingdom. France saw the most daily cases since May and the European Union (EU) is set to overtake the United States in  the number of new daily cases. Whilst hospitalisations and death levels are still far lower than in the first wave back in March, they are starting to  trend higher, with the UK government is warning of a “very challenging winter”.

Various countries across Europe started to enforce new lockdown measures to stem the flow of new cases. The UK government  already brought in localised lockdown measures, and it was also reported that London Mayor Sadiq Khan, wants “fast action” on new measures given the situation is “clearly worsening”. UK authorities are reluctant to go back to a full lockdown as we saw in March, but tighter measures seem inevitable. New restrictions are being added in Holland, Denmark, Spain and France, to name a few.

The market reaction to the new lockdown measures has not been positive and, at the start of this week, the Stoxx Europe 600 Index traded lower. The travel and leisure space suffered the worst punishment, slumping 9% in the past two days.

Given these concerns, we believe market focus will turn to what further support governments will give this embattled sector. For example, there are reports UK Chancellor Rishi Sunak is set to extend UK-wide business support loans.

US Fed Underwhelms

Last Wednesday’s Federal Open Market Committee (FOMC) meeting saw interest rates remain on hold, but brought some confusion to the market, as some observers felt the commentary was not dovish enough. The Fed updated forward guidance to reinforce the message behind its policy framework shift, but it did not adjust the size or composition of its asset-purchase programme.

The FOMC signalled interest rates would remain near zero through 2023 while keeping quantitative easing at its current rate through Treasury and mortgage-backed securities purchases. It was interesting to see there were only two dissents and only one Fed official supported raising rates before 2023. The Fed “expects to maintain an accommodative stance of monetary policy” until it achieves inflation averaging 2% over time, and longer-term inflation expectations remain anchored at 2%.

This week will be interesting for the Fed, as a number of speakers including Chair Jerome Powell will be testifying before Congress to discuss pandemic relief efforts.

The Week in Review

United States

Last week was quiet for equities, with markets focusing on the FOMC meeting. Highlights from the meeting were minimal, but any takeaways were seen as marginally less dovish than anticipated by the market. Stocks sold off by the end of the week, with the S&P 500 Index finishing down 0.6%. The presidential race continues to be a market focus, with continued posturing from both sides.

Meanwhile, West Texas Intermediate (WTI) crude oil prices rebounded last week, up 10.1% after the previous week’s 6.1% decline. Hurricane Sally curbed North American production, and the International Energy Agency (IEA) cut its forecast for US production. The move in the price of oil meant US equities in the energy sector outperformed last week, up 2.9%. At the other end, communication services and consumer discretionary underperformed, both down 2.3%.

The US presidential race will be a key market driver in coming weeks, with Democrat Joe Biden leading Republican President Donald Trump in the national polls. However, as the 2016 race showed us, that does not guarantee victory at this stage. Also, with Trump gaining in pivotal swing states of late, the race could really be on a knife-edge.

US-China trade relations continue to simmer, with the focus now on the Chinese video-sharing app TikTok. President Trump had previously ordered that the app be banned in the United States given concerns around data security to its 100 million US users. Tiktok’s owner, ByteDance, has said it is neither controlled by nor shares data with the Chinese government. Nonetheless, the ban, which was expected to come over the weekend, seems to have been postponed for now after Trump gave his approval on a deal with US firms Oracle and Walmart to allow the app to continue operating in the United States. Oracle and Walmart confirmed they will hold 20% of the new TikTok Global business.

Also, a US judge thwarted the Trump administration’s attempt to ban Chinese messaging app WeChat, stating the ban would have implications for free speech.

The initial public offering (IPO) of US cloud software company Snowflake grabbed some headlines last week. The IPO was the largest-ever US software offering, raising US$2.2 billion. Whilst 2020 looks on pace to be the strongest year since 1990 for IPO activity, this move last week shows still just how much demand there is for US technology.


European markets saw muted performance last week, closing mildly higher. However, that didn’t do justice to what was really going on, as there was some notable divergence in the market, with EU momentum names higher while value declined. In terms of what was driving this, in our view, the index reweighting on Friday was certainly a factor. A number of Eurostoxx additions/deletions took place on Friday, and the huge repositioning exaggerated some moves.

Mergers & Acquisitions (M&A) in focus: M&A picked up in Europe this week. We had the merger terms for Caixabank and Bankia (BKIA/CABK), which is poised to create Spain’s biggest domestic bank. We also had press reports of a potential bid for Covestro (Apollo Global), Ontex reportedly looking to make an acquisition (Domtar Personal-Care Unit) and a bid for GFS (GardaWorld). A very positive thematic in Europe that continues and should aid Europe given valuation levels.

Capital Raisings: Capital raisings were also strong, with a bumper IPO from The Hut Group in the United Kingdom raising US$2.4 billion in Europe’s second-largest listing this year and the biggest on the London Stock Exchange since June 2017. In addition, there was US$2.6 billion raised in placings. So, a lot of supply soaked up over the week.

Brexit: The United Kingdom made moves to de-escalate tensions with the European Union (EU) on Brexit and domestically on the Internal Market Bill. In a clarification statement, the UK government agreed that powers in the Bill should be used in parallel with the appropriate formal dispute mechanism set up under the Brexit treaty. It also offered concessions to rebel Conservative members of parliament (MPs) to try to secure parliamentary approval for the Bill.

UK Prime Minister Boris Johnson agreed that MPs should have a vote to approve the implementation of ministerial powers to override the Northern Ireland protocol that forms part of the Brexit treaty. The part relating to the Northern Irish protocol in the Bill will be debated in the Commons on Tuesday and is likely to pass the House of Commons, after Johnson’s concession Johnson. The UK government said that the latest round of informal EU trade talks had been useful and European Commission President Ursula von der Leyen said she’s convinced a deal is possible. Talks are continuing.

Bank of England (BoE): Last week, the BoE voted to keep policy unchanged but struck a dovish tone on the back of increasing downside risks to the UK economy. These include an increase in virus cases and tightening restrictions weighing on activity, risks of a more persistent period of elevated unemployment as well as rising risks of no-deal Brexit. The BoE is also exploring how a negative bank rate could be implemented effectively, should the outlook warrant its use. Engagement on operational considerations will begin in the last quarter of 2020. This is a clear signal that, should a downturn materialise in the United Kingdom due to a no-deal Brexit or another national lockdown, the BoE seems likely to impose negative interest rates.

Asia Pacific

Asian equities were higher overall last week, with the MSCI Asia Pacific Index closing the week up 1.7%. There were limited macro headlines, with the focus primarily on stock-specific news. Chinese equities outperformed after a late rally on Friday on the back of reports around the deal for Tiktok, which soothed tensions with the United States.

In Japan, the Nikkei lagged after manufacturing data there remained poor, with the index closing the week down 0.2%. The Japanese yen strengthened to near levels last seen at the end of July, not helping the broader equity index in Japan. All sectors in Asia traded higher last week, with the skew favouring momentum stocks. The technology sector led the way, up 3.3%. Like in Europe, financials came under relative pressure, up just slightly.

In political developments, the newly elected Prime Minister of Japan, Yoshihide Suga, announced he will retain Taro Aso as finance minister. Suga also explained that the focus at this time is on the economy, rather than a snap election. Suga was formally appointed as prime minister last Wednesday following the resignation of Shinzo Abe.

Over the weekend, iron ore prices significantly declined following reports of rising supply and a wavering steel market in China. Inventories rose for the fourth week in a row in China and are at unusually high levels for this time of year.

The Week Ahead

Monday 21 September

  • Economic/Political: US Fed holds open meeting on Community Reinvestment Act; ECB’s Robert Holzmann speaks; focus on Italian regional elections

Tuesday 22 September  

  • Economic/Political: Riksbank interest-rate announcement; BoE’s Andrew Bailey speaks; Fed’s Charles Evans speaks
  • Data: Eurozone: (September, advanced) consumer conference; US: (August) existing home sales, (September) Richmond Fed manufacturing

Wednesday 23 September    

  • Economic/Political: Reserve Bank of New Zealand interest-rate announcement; Fed’s Loretta Mester, Charles Evans and Eric Rosengren speak
  • Data: Global: (September) flash manufacturing & services purchasing managers indices– US/UK/France/Germany/Eurozone/Japan/Australia; Germany: (October) Gfk consumer conference; US: (18 September) mortgage applications

Thursday 24 September    

  • Economic/Political: Fed’s Jerome Powell and US Treasury Secretary Steven Mnuchin testify before US Senate banking committee; BoE’s Bailey speaks; ECB publishes economic bulletin; Norges Bank interest-rate announcement; Central Bank of the Republic of Turkey interest-rate announcement; Bank of Japan meeting minutes
  • Data: US: (19 September) initial jobless claims, (August) new home sales; France: (September) manufacturing conference; Germany: (September) IFO

Friday 25 September    

  • Economic/Political: UK sovereign debt to be rated by Fitch; Fed’s Evans speaks
  • Data: US: (August) durable goods orders; Eurozone: (August) M3 money supply; Italy: (September) consumer conference, manufacturing conference, economic sentiment


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

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