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 global equity markets largely unchanged, there but was some notable volatility as markets saw sharp declines on Thursday. A few hawkish comments in the US Federal Open Market Committee (FOMC) June meeting minutes were blamed as a catalyst for US Treasury yields to tighten and for the move lower in equities. Aside from that, the spread of the COVID-19 Delta variant remains a concern for investors. On the week, the MSCI World Index was up 0.2%, the Eurostoxx 600 Index was up 0.2%, the S&P 500 Index was up 0.4% and the MSCI Asia Pacific Index was down 2%.1

Hint of a Taper Tantrum on Thursday?

Equity markets continued their grind higher for much of last week, with the notable exception of Thursday’s session. The MSCI World index traded down 0.9%, the Eurostoxx 600 Index lost 1.7%, and the narrower Eurostoxx 50 Index fell 2.1%, closing below its 50-day moving average support for the first time since the end of January. US equities outperformed Europe on Thursday, albeit still lower, with the S&P 500 Index down 0.8%.

Thursday’s selloff appeared to be a culmination of a few factors currently causing investor nervousness. The June FOMC meeting minutes were released on Wednesday and noted, “various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings”. In addition, “A substantial majority of participants judged that the risks to their inflation projections were tilted to the upside”.  Whilst not that surprising, some suggest this was a touch more hawkish than expected.

It was quieter for macro data last week, but some weaker data points also weighed on sentiment. The ISM Services Index came in at 60.1, weaker than expected and lower than the prior reading of 64.0. The Markit PMI services index was revised lower, and May JOLT job openings report missed expectations, too.

In China, the Caixin Purchasing Managers Index (PMI) services component dropped to 50.3, weaker than expected and lower than the previous reading of 55. This has raised some concerns that we have reached “peak growth” and with the market pricing in a strong pandemic rebound, the bar for expectations looks high.

The COVID-19 backdrop is still a concern, with the Delta variant becoming more and more prevalent globally.

Finally, oil prices have moved lower, with the OPEC+ members beginning to squabble again on whether to extend the current oil supply cuts at the August meeting.

Moves in the bond market also added to the sense of concern, as the US 10-year Treasury yield broke through 1.3% on Thursday after having tested that level on Wednesday. The move in bond yields was accompanied by a strengthening in the US dollar through Wednesday and into Thursday, suggesting that it was more of a safe-haven move. However, these moves helped spook equity investors on Thursday.

Context is key. Even though we saw some selling pressure last week, it’s important to keep the moves in context. Whilst the S&P 500 Index did close lower Thursday, it had made new all-time closing highs the prior day. It’s also worth bearing in mind that coming into the start of the US week, the S&P 500 had been up seven sessions in a row. With earnings season looming large, some profit-taking in often-crowded positions is not too surprising. As we have said before, we expect market volatility around commentary to be a key theme in the second half of this year.

Concerns over Delta Variant

As we have mentioned in recent weeks, the rapid spread of the Delta COVID-19 variant is concerning some investors, as it threatens the improving economic outlook globally. Over the past five days, the Goldman Sachs EU reopening basket was down 4.1%.2 As cases rise, we have seen a number of countries reintroduce travel and social distancing restrictions. The rise of cases is particularly of concern in countries where the vaccination programmes lag the likes of the United States and United Kingdom.

In Europe, Germany and France warned their citizens against travel to Spain, where the coronavirus infection rate has surpassed Portugal to become the highest in mainland Europe. We also saw the Netherlands reintroduce restrictions on restaurants, etc., having removed them just two weeks ago. Note: Even though cases have increased in some areas, 44% of EU citizens are fully vaccinated, so significant progress has been made on vaccinations.

In Asia, we saw new restrictions across the region, with South Korea, Japan, Vietnam and Australia among those to extend lockdown measures.

The United Kingdom remains a crucial bellwether for the route out of the COVID-19 crisis. Daily cases continue to surge (now around 30,000 a day) and some suggest they could hit 100,000.3 However, the vaccination programme now has 66% of the adult population fully vaccinated and 87% of adults have had one dose. Whilst hospitalisations and deaths are edging higher, they are rising at a much slower rate than in previous waves.4

In that context, the UK government continues to plan for most social distancing restrictions to be removed on 19 July. If the UK economy can fully reopen in the face of such a surge of cases, it sets a crucial precedent.

The Week in Review


The market went into risk-off mode through the middle of the week, with a number of factors at play. European equities were down just under 3% on Thursday, marking the weakest daily move on a percentage basis this year, before recovering some of the losses on Friday. Interestingly, in all 12 days where the Eurostoxx has been down by 1% or more this year, we have seen a positive move the next day, on average up 1%. With that, Stoxx 600 closed last week up 0.2%. In terms of the major country indexes, on a week of risk-off, the German DAX Index outperformed, closing up 0.2%. The Spanish IBEX Index lagged once again, down 1.5%. As such, there was a defensive skew to sector performance in Europe with Citi’s European Defensives basket up 0.7% vs. the equivalent Cyclicals basket down 0.2%.5

Another talking point for Europe was some fresh policy commentary from the European Central Bank (ECB). Thursday saw the ECB announce the results of its Strategy Review, raising its inflation goal and stating a willingness to tolerate a limited overshoot of its inflation target, the outcome of a strategy revamp aimed at bolstering the economy after years of lackluster prices and growth. Key points were:

  • Inflation goal changed to “symmetric” target of 2% over the medium term from “below, but close to, 2%”.
  • ECB may allow transitory period in which inflation is moderately above target.
  • Governing Council recommends inclusion of owner-occupied housing into inflation measures over time.
  • Climate-change considerations will be included in monetary policy operations in areas of disclosure, risk assessment, collateral framework and corporate-sector asset purchases.
  • New strategy will be applied starting with July 22 monetary policy meeting.
  • Governing Council intends to assess its strategy periodically, with the next assessment expected in 2025.

ECB President Christine Lagarde told investors to prepare for new guidance on monetary stimulus in 10 days and signalled that fresh measures might be brought in next year to support the euro-area economy after the current emergency bond programme ends. Speaking to Bloomberg Television, Lagarde said the July 22 Governing Council session would bring “some interesting variations and changes.” and “It’s going to be an important meeting”.

United States

As covered in the earlier section, last week’s main focus in the United States was the June Federal Reserve meeting minutes and resulting market volatility in the second half of the week. After making news highs mid-week, the S&P 500 Index ended the week up 0.4% in what was a choppy trading period.

Also, last week US President Joe Biden signed an executive order aiming to reduce the power of big business, focusing on anti-competitive practices. He stated “No more tolerance of abusive actions by monopolies. No more bad mergers that lead to massive layoffs, higher prices and fewer options for workers and consumers alike”.


Asian stocks underperformed last week, as Chinese internet giants weakened after China’s cyberspace regulator ordered app stores to remove Didi days after the ride-hailing firm’s US listing. With that, the Hang Seng Index was down 3.4% last week. Furthermore, technology names also suffered amid news of a widening Chinese tech crackdown; the government fined 22 companies for market violations, including BABA. Tencent and Meituan both erased 2021 gains.

On Friday the People’s Bank of China announced a cut in the required reserve ratio of 50 basis points6 for banks and reemphasized the commitment to a “stable” monetary policy stance.

COVID-19 concerns remain in Asia, with a number of countries extending or reintroducing social distancing measures. In New South Wales, the number of COVID-19 cases has been on the rise of late, and lockdown remains in place. Rising cases in South Korea, Vietnam and Japan also remain a concern.

In this climate, we have seen Asian equites continue to lag in 2021.

The Week Ahead

Macro Highlights

Investors will be sensitive to inflation readings in both the United States and Europe early in the week. US corporate earnings season kicks off, with a number of financials reporting quarterly results.

Tuesday 13 July

  • Germany Consumer Price Index (CPI)
  • France CPI
  • US CPI
  • US Federal budget

Wednesday 14 July 

  • UK CPI & RPI
  • Spain CPI
  • Eurozone Industrial Production
  • US Core Producer Price Index (PPI)

Thursday 15 July

  • UK ILO Unemployment Rate & Claimant Count Rate
  • Italy CPI EU Harmonized
  • Italy General Government Debt
  • US Jobless claims
  • US Industrial production

Friday 16 July     

  • Eurozone EU27 New Car Registrations
  • Eurozone Trade Balance & CPI
  • US Retail 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. Ibid.

3. Sources: JHU CSSE, ONS, Goldman Sachs Investment Research.


5. 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.

6. One basis point is equal to 0.01%.

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