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 traded higher last week amidst low volumes and little in the way of new market drivers, and the MSCI World Index closed the week up 1.5%. In terms of the key regional indexes, the S&P 500 Index closed up 1.4%, the STOXX Europe 600 closed up 1.2%, and the MSCI Asia Pacific (APAC) Index was up 1.1%.1 There were few over-arching market themes. The spread of COVID-19 infections in continental Europe and how governments are managing it continues to contribute heavily to the market push and pull we’ve seen in recent weeks and months.

Some attention is shifting to earnings season, which kicked off in the United States last week. With yields falling, growth/momentum stocks were better off last week, and we saw a rotation into cyclicals vs defensives. Market volatility continues to fall with the V2X in Europe recording its seventh straight week of declines.2 In terms of fund flows, there was further US$25.6 billion of inflows into global equities last week.3

COVID-19 ‘Third Wave’ Continues to Grip Europe

The eurozone remains in the midst of a ‘third wave’ of COVID-19 infections as the UK variant of the virus continues to sweep continental Europe. Daily infections had dipped the week before last to 27.4 per 100,000, but it now appears this was down to less intense testing over the Easter weekend. That incidence number for the eurozone has edged up again last week to 30. The share of positive tests increased from 9.3% to 12% over the same period, suggesting the situation worsened over the Easter holiday period.

The UK variant is the dominant variant in continental Europe; however, eurozone infections are still 62% below the UK’s peak back in January. COVID-19 infections in the United Kingdom continue to fall and are now down at 2.4 per 100,000, from a high of 90 per 100,000 in mid-January. The United Kingdom continues to get through a much greater volume of testing than the European Union (EU), meaning its share of positive tests is now at very low levels.

With rising infection rates, the number of people hospitalised in the eurozone is on the rise again, predominantly in France, Germany and the Netherlands. In France, the number of patients in intensive care units (ICUs) is now 21% higher than at the peak of the second wave (in mid-November 2020). The German health system is feeling the strain too, with only 12% of ICU beds free. As of 14 April, 4,700 were receiving COVID-19 treatment in ICUs in Germany, up from 2,900 four weeks ago.

Vaccinations in continental Europe are starting to pick up, and several countries have reported a record of daily doses administered last week (Germany: 738,500 on 14 April; France: 510,000; Spain: 454,000; Belgium: 100,000). The United Kingdom has already given at least one vaccine to 48% of its population. The EU is currently vaccinating around the same rate as the United Kingdom but is about seven weeks behind on overall numbers. At their current pace, Germany, France, Italy, Spain and the Netherlands would be on track to inoculate more than 55% of their total populations by the end of June, two weeks ahead of schedule. But the course of vaccination depends on whether the projected supply will arrive (360 million doses expected in the second quarter for the EU, after 108 million delivered in the first quarter. A study by Oxford University last week showed that Pfizer and Moderna vaccines could pose the same blood clot risk as Astrazeneca’s.4 With EU member states taking a very precautionary stance on the Astrazeneca vaccine in recent weeks, there may be inclination to do the same with others.

The current lockdown situation is mixed across Europe. The United Kingdom began to open non-essential shops, outdoor hospitality and outdoor attractions in England last week for the first time since the Christmas holidays. In Germany, it was reported that the country is expecting 6-8 weeks of heightened infections.  Last Tuesday, the German cabinet passed a federal law forcing all regions to implement the same lockdown measures, including curfews, if the seven-day incidence rate surpasses 100.

Travel restrictions have been increased or extended in Italy and Spain; however, both countries’ economies are under pressure to open borders ahead of the summer months.

In terms of equity market moves, the Goldman Sachs Stay at Home basket outperformed last week, up 3.1%, whilst the equivalent Going Out basket was up just 0.4%.5 In terms of data, the United Kingdom will likely follow the United States in reporting improved retail sales for April and May. US retail sales were up 9.8% month-on-month in March as the economy began to reopen.

Week in Review


European equities seemed to lack conviction last week, with volumes at the lowest level seen this year and with muted performance dispersion. The STOXX Europe 600 Index remained resilient and closed the week up 1.2%. France was the best performer, with the CAC40 Index up 1.9% as the country’s vaccine rollout ramped up. Germany and the United Kingdom weren’t far behind, with the German DAX Index up 1.5% amid strength in the automobile sector, and the UK FTSE 100 Index was up 1.5%, helped by its high weighting in resources. The basic resources sector (+4.4%), was the week’s standout performer as the year-to-date winners outperformed, also helped by a weaker US dollar.

Spanish equities underperformed, with the IBEX 35 Index (-0.6%) the only major European country index in the red. COVID-19 infection numbers continue to rise significantly in Spain following a relaxation of lockdown rules to attract foreign tourists. As noted, stay-at-home names outperformed the reopeners following more headlines of issues with the Astrazeneca and J&J vaccine rollouts amid rare but serious blood clots. That said, the UK reopening names fared better than their European counterparts, boosted as England reopened non-essential shops and outdoor dining and drinking establishments.

European earnings season ramps up next week, and according to the latest Bank of America Merrill Lynch fund managers survey, eight out of 10 participants see further upside for European equities, with earnings per share growth expectations at the highest level since 2004. Of respondents, 91% expect a stronger European economy over the next 12 months, in line with last month’s reading and close to the highest level in more than 15 years. We would note that European upgrades are outpacing downgrades by the most in over a decade.

United States

It was another strong week for US equities, with the S&P 500 Index up 1.4%, seemingly following the path of least resistance. Looking at sectors, the utilities and materials names outperformed, with the latter boosted by underlying commodity strength. The strength in miners came after Chinese data showed strong imports and as Goldman Sachs warned of a major copper deficit. Crude oil prices were also strong, with the West Texas Intermediate (WTI) up 6.4% on the week on the back of bullish US Department of Energy data and a positive monthly report from the International Energy Agency.

Retail sales were strong, up 9.8% month-on-month (m/m), but this figure was likely elevated by the one-off US$1,400 stimulus cheques, suggesting it may be temporary in nature. March consumer price index (CPI) inflation data showed a significant uptick (+2.6% m/m), but energy was the main influence there.

With the drivers of the better macro data seemingly temporary in nature, recent worries about inflation eased somewhat. Looking at the labour market, continuing claims were unchanged. Full employment is a key driver for Federal Open Market Committee (FOMC) action, so this also suggests that an interest-rate hike is unlikely any time soon. All of this helped interest rates to stabilise, with the US 10-year Treasury yield falling for a second week and hitting a one-month low.

It is worth noting an article from Financial Times over the weekend suggested consumers globally have amassed a surplus US$5.4 trillion in savings since the beginning of the pandemic, with the United States leading the way.6 There has also been a marked increase in consumer confidence, with one metric (the Conference Board global consumer confidence index) hitting its highest level since 2005, when those records began. Pent-up demand, increased savings, and a boost in confidence all suggest we could see a surge in consumer spending as vaccine rollouts continue and economies reopen.

Geopolitical tensions made headlines but had little impact on US markets. On Thursday, the United States imposed fresh sanctions on Russia, which included restrictions on buying new sovereign debt. This was in response to US allegations of Russian influence/misconduct in US elections, and the SolarWinds hack.


After a lacklustre performance the prior week, the MSCI APAC Index traded in line with global equities and closed up 1.05% last week, with mixed regional performance. South Korea, Australia, and Hong Kong were the week’s winners, whilst Japan and mainland China underperformed.

There were concerns around tightening liquidity as the People’s Bank of China refrained from adding more liquidity into the banking system for a fourth month, as policymakers sought to contain rising leverage, effectively draining cash from the system. The Bank of Korea left rates on hold last week and said that it would maintain its accommodative policy stance, whilst also raising its growth expectations, helping South Korean equities to close the week up 2.1%.

Shanghai’s underperformance also came despite headline figures showing a strong economic first- quarter recovery in China vs. the prior year. Data last week showed a record year-on-year (y/y) growth rate, and first-quarter gross domestic product (GDP) grew 18.3% y/y (the fastest rate since records began in the 1990s). The strength was largely expected, however, given that the prior year the economy had contracted for the first time in decades as the pandemic hit. On a quarterly basis, economic expansion was actually significantly below expectations at just +0.6%, suggesting that we should remain cautious around the pace of recovery.

On the geopolitical front, China has stepped up incursions into Taiwanese airspace in recent weeks. This is thought to be an attempt to signal to the United States to stand down in the region. At the US-Japan summit last week, Japanese Prime Minister Yoshihide Suga said his country would join the United States in opposing coercion in the South and East China seas, reaffirming ‘the importance of peace and stability of the Taiwan Strait’. Market impact is limited so far, but the situation continues to bubble away in the background.

Week Ahead

The main event in Europe will be Thursday’s European Central Bank (ECB) meeting, although little movement is expected. It’s a busy week for UK macro data, with the Labour Report, consumer prices index (CPI) inflation and flash Purchasing Managers’ Index (PMIs) all expected. We also get euro area flash PMIs out on Friday.

On the political front, in Germany, the Christian Democratic Union, Christian Social Union CSU and Green parties have to nominate their candidates to succeed current Chancellor Angela Merkel by 20 April at the latest.

Macro Calendar

Monday 19 April

  • Eurozone ECB current account
  • Italy current account balance
  • Eurozone construction output

Tuesday 20 April

  • UK claimant count & International Labour Organization (ILO) unemployment rate
  • Germany producer price index (PPI)

Wednesday 21 April

  • UK CPI & Retail Prices Index (RPI)

Thursday 22 April

  • France business and manufacturing confidence
  • Italy Industrial sales
  • Eurozone government debt/GDP ratio
  • US jobless claims

Friday 23 April

  • France Markit manufacturing PMI
  • Germany Markit manufacturing PMI
  • UK Markit PMI manufacturing
  • US Markit manufacturing PMI

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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. Vehicle-to-Everything (V2X) encompasses many technologies and solutions. The V2X market supports many different use cases, applications, and services.

3. Source: Bank of America Merrill Lynch.

4. Source: University of Oxford, ‘Cerebral venous thrombosis: a retrospective cohort study’, 14 April 2021.

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

6. Source: Financial Times, ’Global savers’ $5.4tn stockpile offers hope for post-Covid spending’, 18 April 2021.

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