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

Last week saw a sharp pullback for equity markets as fresh COVID-19 lockdowns in Europe and nerves over the US election outcome weighed on investor sentiment. In addition, we saw weakness in the US technology heavyweights in their third-quarter earnings reports. The week ended with the S&P 500 Index down 5.6%, the Stoxx Europe 600 Index down 5.6% and the MSCI Asia Pacific Index also down 2.5%.1 The MSCI World index was down 5.3% by the end of the week.

Frayed Nerves Over US Election 

Last week saw a reversal of sentiment over the potential US election outcome, with investors de-risking as fears of a contested result grew. Several weeks ago, we saw equity markets trading higher as hopes grew for a clear outcome in the elections, with Democratic nominee Joe Biden performing well in polls and chatter of a potential “Blue Wave” Democratic sweep of the Senate easing nerves. Whilst Biden still has a comfortable lead in the national polls, we have seen President Donald Trump gaining ground in key swing states, notably Florida, which is key to Trump’s re-election hopes.

Trump is still trailing Biden in the polls in the majority of these swing states, but this was also the case in the 2016 US elections, so there is a concern a late surge by Trump supporters could leave the possibility of weeks of legal wrangling over the true winner. We remember back to the 2000 US elections when it took five weeks for the courts to resolve the outcome.

In terms of the market impact, it is clear a contested election will not benefit anyone. Political unrest, lack of progress on stimulus, and a lack of leadership on COVID-19 as cases continue to soar are all negative for the markets. A clear victor either way should ease investor nerves and see markets recover ground, particularly given the recent weakness.

When will we know the result? This year’s election is like no other as we have seen a huge amount of postal voting, and in many states mail-in votes can be accepted for a period after election day (Ohio will accept them up to 13 November). The longer the wait for a result drags, the worse it will be for equity markets.

From a European perspective, some argue a Biden win would be positive for European assets given the reduced trade and geopolitical uncertainties, stronger US-Europe political and economic ties and major fiscal stimulus (infrastructure, clean energy and communications).

Fresh COVID-19 Lockdowns in Europe

With new COVID-19 cases spiking across Europe last week, most of the region imposed new lockdown measures, including all the major economies. Most countries are stopping short of the full lockdown we saw in March, with most leaving schools and factories open. Despite this, the worsening of the pandemic situation has caught many investors off guard.

On the back of these fresh lockdowns, we have seen some revised growth projections for the region.

In the United Kingdom, although there are regional nuances, most of the country is essentially already in lockdown or will enter it this week. Over the weekend, the UK government announced England will go into lockdown for four weeks on 5 November. While schools and universities will remain open this time around, restaurants, pubs, non-essential retail stores, leisure and entertainment will once again be forced to shut.

The UK has extended its job furlough scheme to offset the impact of the new lockdown, but there will be pressure on UK Chancellor Rishi Sunak to announce further support.

Week in Review


Last week was tough for European equities, with negative news and uncertainty causing  the STOXX Europe 600 Index to close the week down 5.6%. The euro also came under pressure, down 1.8% vs. US dollar. The focus was on further lockdowns across the region, as discussed. With the second wave of COVID-19 now here, European equities saw their largest outflows in five months last week. Better macro data towards the end of the week showed that eurozone economies recovered more than expected in September, but this has failed to boost sentiment, with fresh restrictions likely to undermine recovery in the rest of the year.

Eurozone gross domestic product (GDP) grew 12.7% in  the third quarter, ahead of  expectations, but this is backward-looking, and we know further challenges remain. The German DAX Index was the clear underperformer, not helped by a profit warning from heavyweight SAP, which  closed the week down 27%. It has a significant weighting in both the DAX and the Euro Stoxx 50, exacerbating losses for both indices.

There seemed to be a lack of fresh buyers on the move lower in Europe, which ties in with a severe lack of risk appetite driven by the political uncertainty in both the United States and Europe, given the Brexit backdrop.

It was a quieter week in terms of Brexit news, but there were some reports that negotiators have made progress on some of the biggest sticking points. Both sides are said to have begun working on the text of an agreement on the level competitive playing field and are close to finalising a joint document covering state aid. This sounds positive, but differences are said to remain.

European Central Bank (ECB): December in Focus

There was little surprise at last Thursday’s ECB meeting, with all policy measures left unchanged and dovish commentary. The central bank signaled that a package of easing measures would come at its December meeting, alongside new economic forecasts. A new paragraph was added to the introductory statement, which importantly said that on the basis of its December assessment, “the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation”. ECB President Christine Lagarde said that the risks to the economy are “clearly titled to the downside”.

European Bank Focus

European banks tried to put on a positive front last week, with HSBC, Santander and Lloyds all with optimistic outlooks. European banking stocks have hit record lows in recent weeks and whether certain regulators will allow banks to resume the payment of dividends this year remains a hot topic. Swiss banks look the most optimistic. Some are advising caution and focusing on the importance of conserving capital until the full repercussions of the pandemic are clearer. There is also an argument that instead of indiscriminate bans, the issue of dividends should be dealt with on a case-by-case basis.

United States

The US election uncertainty and lack of stimulus caused all three major US indices to close lower last week. It was also a busy week for third-quarter earnings. Despite a large number of better-than-expected results, the fourth-quarter outlook remains very uncertain. This was apparent as big technology company earnings have also failed to boost sentiment. Alphabet, Apple, Amazon, and Facebook all released results after Thursday’s close.

Despite sales beating estimates across the board, there were concerns over outlook for Amazon, uncertainty for Facebook, and iPhone China sales for Apple, which saw all three move sharply lower on Friday, leaving the NYSE FANG+ Index down 5.9%. The small number of firms who have missed vs. earnings-per-share (EPS) estimates have also been hit hard, with the average price reaction the worst seen in five years.

Crude oil also came under pressure last week as renewed lockdown measures threaten an already-shaky recovery for demand. West Texas Intermediate (WTI) was down over 10% on the week, with October seeing the largest monthly drop since March.

Asia Pacific (APAC)

Equities in the APAC region failed to escape the global selloff, although losses were less extreme than in the United States and Europe, as the region continues to recover from the pandemic. On Sunday, Australia recorded its first day with no local cases of coronavirus transmission since June. China is also the only big economy expected to show growth this year, with the International Monetary Fund (IMF) projecting growth of 1.9% (and +8.2% in 2021).2 The outcome of this week’s US election stands to have an impact on China’s outlook as it will set the trajectory for trade tensions going forward.

Ant Group’s initial public offering (IPO) was a focus last week, with the dual bookbuild complete in Hong Kong on 28 October (a day earlier than planned in a reflection of just how much demand there is) and Shanghai on 29 October. The deal is set to be the world’s largest-ever stock sale. As well as institutional demand, there has been a frenzy among retail investors, with many willing to borrow large chunks of cash in order to secure shares. The stock is set to begin trading on 4 November.

The Bank of Japan (BOJ) kept monetary policy on hold at its meeting last week. The central bank did trim growth forecasts for 2020, but predicted a stronger rebound in 2021. It seems that caution remains in Japan, both for consumers and businesses, even though COVID-19 is largely under control domestically. Subdued auto demand continues to weigh on sentiment. BOJ Governor Haruhiko Kuroda said that the economic outlook remains highly uncertain and flagged “big downside risks” at the press conference following the meeting.

Week Ahead

This week is all about the US election and the ongoing pandemic. We also hear from the Bank of England (BoE) and the US Federal Reserve on Thursday. It’s also another big week for earnings in the United States and Europe.

Monday 2 November

Macro: Global manufacturing Purchasing Managers’ Index (PMI); Japan vehicle sales

Tuesday 3 November

Politics: US Election

Macro: US Factory Orders

Wednesday 4 November

Macro: Global services and composite PMI

Thursday 5 November

Macro: US initial jobless claims; Germany factory orders; Eurozone retail sales

Monetary Policy: BoE policy meeting (interest-rates expected to remain unchanged, asset purchase program expected to be increased by £100 billion), Federal Open Market Committee interest-rate announcement (no change expected).

Friday 6 November

Macro: US nonfarm payrolls; Germany industrial production; Italy retail sales



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