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

Global equities were worse off overall last week, with the MSCI Global Index closing the week down 1.4%, the S&P 500 Index down 1.5% and the Stoxx Europe 600 Index down 0.8%, although the MSCI Asia Pacific Index outperformed, up 0.2%, missing some of Friday’s late weakness.1 Markets struggled for any true direction, with a number of different factors at play.

The proposed US$1.9 trillion fiscal package announced by President-elect Joe Biden was the key focus for the United States, whilst in Europe, politics and the continuing fight against COVID-19 held investor attention. In terms of global fund flows, equities saw US$26.8 billion of inflows, whilst there were US$13.7 billion of inflows into bonds, US$0.4 billion into gold and US$9.3 billion out of cash.2 Of note, last week saw the second largest inflow ever into global energy stocks of US$3.6 billion.3

European Politics

After Brexit and the European Union (EU) budget spat that dominated the end of 2020, we have a few new European political situations to focus on. In Germany, the ruling Christian Democratic Union (CDU) party began the process of selecting current Chancellor Angela Merkel’s successor; in Italy, the already-shaky coalition got a little shakier; and in the Netherlands, the government resigned last Friday (although elections were already scheduled for March).


Last week saw a minor party leave Prime Minister Giuseppe Conte’s ruling coalition, threatening his grip on power. The previous Prime Minister, Matteo Renzi, and his party, Italia Viva, left due to concerns over the government’s response to the COVID-19 crisis.

Next step is a vote of confidence in Conte’s government in the Senate on Tuesday. If he loses that vote, he will have to offer his resignation to President Sergio Mattarella. However, that does not necessarily mean fresh elections, something the president will be keen to avoid at such a time of crisis. Mattarella can ask the parties in parliament to form a new government, or create a broader coalition led by a technocrat; there has been chatter of Mario Draghi, who previously served as president of the European Central Bank (ECB) between 2011 and 2019.

Markets have been pretty sanguine in response so far, with the FTSE MIB Index closing down 1.7% last week, outperforming the German DAX, UK FTSE Index and the CAC 40 Index. Italian debt yields widened a little, but with ECB quantitative easing firmly in place, moves here are more muted. We have definitely been due a wobble in Italian politics, as this government has been in place since 2019, Relatively speaking, it’s quite good longevity for Italy, which tends to be politically volatile.


Germany’s ruling CDU party held a vote over the weekend to decide on the new leader of the party, with 1001 delegates from the party’s local, regional and state associations voting. The party picked politician Armin Laschet to become the new chairman. The final result will be announced on 22 January. This now puts Laschet in poll position to become the chancellor this autumn; however, if the party performs poorly at the state elections in March, there is still a pathway for the more popular politician Markus Söder of the Christian Social Union (CSU) to become chancellor when Merkel steps down.

Who is Armin Laschet? He is the current prime minister of the state of North Rhine-Westphalia, the most populous state in Germany. He is generally seen as a close ally to Merkel, and his leadership would likely be more or less a continuation in the broad directions for the CDU. A transition from Merkel to Laschet would likely be a smooth one. Laschet was viewed as the continuity candidate and it’s likely that CDU policy on fiscal and domestic issues as well as foreign affairs would unlikely change. He is also seen as being an ardent pro-European.

Laschet still faces two major hurdles to become chancellor. He has to gain the support of the Bavarian centre-right CSU to be the joint candidate, then he must win the national election in September. That might not be straight-forward, as Laschet is not favoured among the German public. In one opinion poll, Laschet came fifth, well behind the leader of the CSU Markus Söder. If the CDU does well in the state elections in March and there is a marked increase in the popularity of Laschet, then it is likely he will be chosen as the CDU/CSU point candidate for chancellor. If not, then he may be asked to cede the role to Söder.


Following a long-running domestic scandal over child benefits, the Dutch coalition government resigned on Friday. However, this news had little impact on markets given there are scheduled elections for March. Incumbent Prime Minister Mark Rutte will remain in charge as Caretaker PM until the election on 17 March. In the runup to the last election in 2017, there was a focus on the threat of an anti-EU populist government, but Rutte’s centre-right party prevailed in the end. As it stands, Rutte is leading in the polls ahead of this election, seeing a rise in support through the COVID-19 crisis. If polls stay as they are (and are accurate), from a market perspective, the election should be a benign event.

Week in Review


European equities were mixed last week as markets struggled for conviction either way most of the week. Nonetheless, markets closed lower overall. Sentiment took a hit near the close on Friday on news that US pharmaceutical Pfizer’s delivery of vaccines to the European Union (EU) would be delayed over the next few weeks. Europe continues to be in the grip of COVID-19, with infection rates showing few signs of abating just yet, whilst countries attempt to ramp up their vaccination programmes.

Domestic politics came back to the fore in Europe again this week. As noted, In Italy, Giuseppe Conte lost a small coalition partner, whilst Germany prepared itself for a CDU leadership election to establish who is likely succeed Angela Merkel. Also, the report of the resignation of the Dutch government hit on Friday. This increase in political uncertainty (certainly in Italy and the Netherlands) comes at a key moment in managing the pandemic.

In terms of moves, the FTSE 100 Index lagged on the week as UK equities gave back some of their gains from the previous week. The more domestically focused FTSE 250 Index also closed down 2.1%. In terms of factors, value stocks outperformed as the week went on, while momentum stocks lagged. The lack of investor conviction meant that sector performance was mixed. Health care stocks outperformed, and the only other sectors to close in the green in Europe were technology and telecommunications. At the other end, basic resources closed lower, giving gave back some sizeable gains from the prior week. Two other winners from the previous week, utilities and construction and materials, pared some of their gains too.

Europe’s fight against COVID-19 remains precariously balanced. The number of infections and deaths across Europe are still at elevated levels. Domestically, countries are trying to action vaccination programmes as efficiently as possible. However, it may be a number of weeks before we see the true impact of this. With that, many countries across Europe remain in lockdown.

There was a further negative headline over the weekend as Norway reported that 29 elderly people with serious underlying health conditions died after receiving inoculations. Governments around the world are now seeking assurances from Pfizer on this.

United States

Last week saw mixed performance for US equities, with the S&P 500 Index down 1.4% and Dow Jones Industrial Average down 0.9% on the week, whilst the small-cap Russell 2000 Index gained 1.5%. Looking at sectors, the energy space was a clear outperformer, followed by utilities. The laggards were the growth heavyweights, communication services and technology. There was a clear value bias, with the Russell 2000 Index and energy outperforming on talk of a rotation in allocation into value and cyclicals.

It was a busy week in terms of US newsflow, but the most notable was Biden’s proposed US$1.9 trillion economic package to support the US economy through the COVID-19 crisis. It included: US$1 trillion to US households via US$1,400 stimulus cheques; US$415 billion to combat the virus and distribute vaccines; US$440 billion for the most hard-hit businesses; a 33% increase in supplemental unemployment benefits to US$400 a week and extension through September; an extension of moratoriums on foreclosures and evictions until September; expanded paid leave; and increases in the child tax credit. Equities markets actually traded a little lower on this news, as much of it was already anticipated, but a new minimum wage proposal and talk of higher taxes unsettled some investors.

Looking ahead, it is thought the new COVID-19 relief package will pass at some point between mid-February to mid-March. Biden also made clear that he would be laying a second, broader economic recovery plan in February at a joint session of Congress.

Another interesting discussion point from the proposed stimulus package is how much the US$1,400 cheques may further fuel retail investing. The Goldman Sachs Retail Favourites basket traded higher last week (up 1.5%) and this continues to be an important dynamic to watch for US equities (and cybercurrencies!).

Elsewhere, we saw fourth-quarter (Q4) 2020 earnings season kick off last week, with a number of financials reporting on Friday. Results from Citigroup, Wells Fargo and JPMorgan Chase broadly exceeded expectations, but the stocks had seen a good run ahead of their respective earnings releases, and thus the moves after were muted.

Finally, there were a number of Federal Reserve (Fed) speakers last week, with the message remaining dovish. Chair Jerome Powell said the Fed was far from considering an ‘exit’ to its supportive policies. He acknowledged the Fed needed to be careful in communicating any message on asset purchases, as they look to avoid a repeat of the infamous ‘taper tantrum’ in 2013.

Asia Pacific

It was a mixed week for equities in the Asia Pacific (APAC) region, with the MSCI APAC Index up just slightly at the end of last week. Hong Kong’s market outperformed, whilst in South Korea, the Korea Composite Stock Price Index (KOSPI) was the week’s underperformer. However, we would caveat that this comes after the previous week’s gains of almost 10%. Japanese equities were higher last week despite three regions (Kyoto, Osaka and Hyogo) seeking state of emergency declarations over the pandemic early in the week.

Macro data showed that China’s economy continues to recover, with surging exports boosting a trade surplus. Thursday’s data release showed that exports were up over 18% year-on-year in December, a new record monthly level, and up 3.6% for the full year. Data at the start of this week showed that China’s gross domestic product (GDP) growth exceeded pre-COVID-19 levels, hitting +6.5% in Q4 and +2.3% for the full year, with the increase driven by industrial production (+7.1% in Q4 2020).

Outgoing US President Donald Trump’s administration has continued to ramp up its pressure on Beijing in its final days, with the US state department targeting Chinese officials with sanctions in response to Beijing’s crackdown on the pro-democracy movement in Hong Kong. Last week, more than 50 activists were arrested in Hong Kong, several of whom were former lawmakers who had resigned after four former colleagues were disqualified in connection with the security law imposed in the territory last year.

In addition, the United States put several more Chinese companies on blacklists, including China’s biggest smartphone maker, Xiaomi, and the state-controlled China National Offshore Oil Corporation, because of alleged ties to the Chinese military. Americans are banned from investing in companies on the list. Shares in Xiaomi dropped over 10% on Friday. The stock had previously benefitted from the US sanctions against its competitor Huawei.

Trade relations with the United Kingdom also appeared strained, with the United Kingdom to fine companies if they cover up imports from the autonomous Xinjiang region, responding to reports of human rights abuses. Companies with annual sales of over GBP 36 million must publish supply chain transparency reports.

Week Ahead

Thursday’s ECB meeting will be in focus, with no change in interest rates expected, but dovish guidance anticipated. We also hear from the Bank of Japan (BoJ) on the same day.

On the macro front, the impressive Q4 GDP print from China has garnered early attention to kick off the trading week. We also have the German ZEW January survey expected Tuesday—it will be interesting to see if vaccine hopes have lifted expectations. Global Purchasing Managers Index (PMI) data on Friday will be key. We also get some high-profile earnings results from US banks, with Bank of America Merrill Lynch and Goldman Sachs on Tuesday and Morgan Stanley reporting on Wednesday.

The United States markets are closed 18 January for Martin Luther King Day.

Monday 18 January


Europe: Italy consumer price index (CPI)

APAC: China GDP, China retail sales, China industrial production, Japan industrial production

US: None/holiday

Tuesday 19 January


Europe: Eurozone new car registrations, eurozone ZEW Survey Expectations, Germany ZEW survey expectations and current situation, Germany CPI

APAC: None

US: None

Wednesday 20 January


Europe: UK CPI, eurozone CPI

APAC: None

US: MBA mortgage applications

Thursday 21 January

Monetary Policy

ECB policy update and press conference, BoJ policy update.


Europe: Eurozone consumer confidence


US: Initial jobless claims, continuing claims

Friday 22 January


Europe: Eurozone PMIs, UK retail sales, UK PMIs, UK consumer confidence

APAC: Japan PMIs

US: PMIs, existing home sales

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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.
2. Source: EPFR Fund Flows and Allocations.
3. Source: Ibid.

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