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 marginally lower last week, with much of the focus at a company level as first quarter (Q1) earnings season progresses. The MSCI World Index closed the week down 0.2%, while the STOXX EUROPE 600 Index was down 0.4%, the S&P 500 Index was flat, whilst the MSCI Asia Pacific Index was down 0.9%.1 Despite strong earnings and record beats, there was lacklustre price action, with significant divergence in each region.

Inflation is showing signs of picking up in Europe, with the German Harmonised Index of Consumer Prices (HCPI) above the European Central Bank’s (ECB) target level. The latest Federal Open Market Committee (FOMC) meeting was largely uneventful. On global fund flows, cash was king last week amid large inflows.

In terms of European earnings, 45% of the STOXX EUROPE 600 Index constituents have now reported Q1 earnings. This has been the second-best season since 2005 in terms of exceeding earnings per share (EPS) estimates, with 74% beating expectations. Q1 EPS growth is coming in at +41% year-on-year (y/y), surprising positive. Revenue growth is up 3% y/y, with seven out of 10 sectors reporting positive sales growth. On the top line, 66% of companies are beating sales estimates. Despite that, from an equity market perspective, Q1 misses have been punished more than beats have been rewarded.

Overall, banks have been the winning sector, but still trading below pre-pandemic levels. Utilities have been the losing sector so far through earnings season—the only sector in Europe to trade lower year-to-date. In Europe, this week again holds a heavy calendar for corporate earnings, with 115 companies (19.1%) of the STOXX EUROPE 600 Index due to report earnings and sales.

In the United States, 208 companies of the S&P 500 Index have now reported earnings, with 83% exceeding earnings estimates, a record high. The largest companies in the S&P 500 Index have beaten earnings expectations by 21.9% but have missed sales expectations by 1.0%. Overall, companies handily beating EPS margins have not necessarily seen better share-price performance though.

Week in Review


European equities were mixed last week with corporate earnings driving big sector divergence. The STOXX EUROPE 600 Index closed the week down 0.4%. Market volatility rose again, with the European Volatility Index (V2X) up 13% in Europe, with a few different factors providing the push and pull.2 Corporate earnings have certainly been a driver, but over the last couple of weeks some observers have been questioning whether we will see a sensible selloff in certain areas of the market as valuations remain stretched and equities trade around all-time highs; sentiment appears to suggest that investors are expecting a pullback.

The reopening trade was back on, as governments around Europe provided a bit more clarity on ending lockdowns and as economic data has improved in the region. Goldman Sachs’ reopening basket closed the week up 2.5%, whilst the Stay-at-Home basket was down 0.3%. In terms of country indices, Spain’s IBEX 35 Index was the clear outperformer last week in the region, up 2.3%, helped by strength in the banks and travel and leisure, up 6% and 2.7% respectively.

Sector divergence has been a theme in April, with a near-12% spread between the best and worst performers in the region (retail up 6.7%, automobiles down 4.7%). That theme was evident again last week, with a remarkable 9% spread in sector performance as banks were up 6% on the week, and automobiles were down 2.9%. The automobile selloff last week felt like rotation. US car manufacturer Ford fell as much as 10% on 29 April after reporting earnings; the company offered a bleak view for the year, which didn’t help its European peers. Semiconductor chip shortages also remain a headwind for the sector.

Meanwhile, the travel and leisure sector in Europe was up 2.7%, helped by a report from the European Commission stating the European Union (EU) will let vaccinated Americans visit this summer. Growth stocks have been better off through April, but there was solid outperformance for European value stocks last week versus momentum.

United States

Corporate earnings likewise dominated US equity markets. Sector divergence was significant stateside, with a 5.7% spread between the top performer (energy, up 3.6% last week) and the underperformer (technology, down 2.1%). In amongst all the noise, there was a new all-time high for the S&P 500 Index last Thursday as strong economic data and better-than-expected earnings breathed fresh life into the reflation trade. The index pared those gains last Friday to finish near flat on the week.

Reopening headlines were also supportive, with New York City Mayor Bill de Blasio announcing plans to fully reopen the city on 1 July, though Governor Andrew Cuomo pushed back, staying that he would like it to happen even sooner. Chicago Mayor Lori Lightfoot also announced an easing of restrictions to allow for more seating capacity at restaurants, bars and other indoor venues. Also, last week, the White House released its ‘American Families Plan’, worth US$1.8 trillion, which would be funded by tax increases over the next 15 years for wealthy Americans—all in line with US President Joe Biden’s campaign pledges.

Last week’s FOMC meeting saw little movement from the central bank, which kept rates on hold whilst strengthening its outlook. Federal Reserve (Fed) Chair Jerome Powell said that ‘it’s not time yet’ to talk about tapering as the recovery ‘remains uneven and far from complete’. Nonetheless, on Friday, Robert Kaplan of the Dallas Fed (non-voter) did suggest he would support tapering as he was ‘observing excesses and imbalances in financial markets’, making it ‘appropriate to start talking about adjusting those purchases’. So, it feels like we could see a little more push and pull on that point going forward.

Asia Pacific (APAC)

Asian equities finished lower across the board last week last week, with the MSCI Asia Pacific Index closing down 0.9%. Volumes were lower ahead of the China Golden Week holidays, which started this past weekend. Sector divergence was notable in Asia too, with energy the outperformer, up 2.7%, whilst health care stocks were down 2.5%.

Focus in the region remains on the devastating escalation in COVID-19 cases in India, as new daily cases near 400,000. The health care system remains at breaking point, with many countries providing aid to assist India in desperately fighting the surge in cases and deaths. German biotechnology company BioNTech said its vaccine is effective against the Indian variant. Elsewhere, new coronavirus cases hit a 3-month high in Japan ahead of holidays this week. There was a rise in cases in South Korea, with untraceable infections at their highest point ever. There are signs of stabilisation in cases in Thailand, as the country entered strict lockdown.

Last week, China announced that steel export tax rebates would be cancelled for 146 steel products from 1 May. The removal of the 13% value-added-tax (VAT) rebate is positive news for producers outside of China, as exporting becomes less profitable for China.

Chinese Purchasing Managers’ Index (PMI) data was mixed on Friday. The Caixin/Markit China PMI rose to 51.9 in April, bouncing back from an 11-month low in March, but still well below levels recorded for much of last year. Separate China PMI data, which examines larger, state-owned companies and was also released on Friday, showed a slower-than-expected expansion of 51.1.

Week Ahead


Monday 3 May:  UK, China, Japan, Thailand, Greece, Ireland, Poland, Romania, Russia

Tuesday 4 May:  China, Japan, Greece

Wednesday 5 May: China, Japan, South Korea, Thailand

Macro Week Ahead Highlights

Monetary policy decisions look likely to dominate the week ahead. Central banks in the United Kingdom, Norway and Turkey are all likely to keep interest rates on hold to help their economies recover from the ravages of COVID-19. Industrial production (IP) figures for March from Germany and France will probably show greater resilience as supply constraints ease. The April US employment report (including nonfarm payrolls) comes out on Friday and will be closely watched as usual.

Key Events

Thursday: Norway central bank meeting; Bank of England (BoE) meeting

Friday: Germany IP (month-on-month); France IP (month-on-month)

Monday 3 May

  • Germany: March retail sales
  • Global: April manufacturing PMI
  • US: April ISM manufacturing, April wards vehicles

Tuesday 4 May

  • China: April Caixin manufacturing PMI
  • UK: March mortgage applications, March M4 money supply
  • US: March trade balance, March factory orders
  • South Korea: April Consumer Prices Index (CPI)
  • Reserve Bank of Australia (RBA) interest-rate announcement
  • ECB’s François Villeroy speaks

Wednesday 5 May

  • Global: April services and composite PMI
  • US: April ADP employment, April Institute for Supply Management (ISM) non-manufacturing
  • Fed’s Charles Evans and Loretta Mester speak

Thursday 6 May

  • China: April Caixin services and composite PMI
  • Germany: March factory orders
  • US: May 1 initial jobless claims
  • Japan: April vehicle sales
  • BoE interest-rate announcement
  • ECB publishes economic bulletin
  • Norges bank interest-rate announcement
  • Bank of Japan March meeting minutes
  • ECB’s Isabel Schnabel speaks
  • Fed’s Robert Kaplan and Loretta Mester speak
  • Norges bank Governor Oystein Olsen speaks

Friday 7 May

  • US: April employment report
  • Germany: March IP, March trade balance
  • France: March IP
  • Italy: March retail sales
  • Japan: April monetary base
  • China: April Caixin services & composite, April trade balance,  April foreign reserves
  • ECB’s Christine Lagarde speaks

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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. Indices are unmanaged and one cannot invest directly 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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