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 weaker overall last week with much of the focus on the latest round of corporate earnings releases, which look good so far and were surprisingly positive. It was also a week where China widened its regulatory net on big technology companies, which weighed on market sentiment, leading equities lower overall by the end of the week. The vaccination programme in Europe was praised as data on infections appeared to make a much-needed reversal, calming any investor fears. The Federal Reserve (Fed) was in focus, as Chair Jerome Powell delivered a suitably dovish message. Overall, the S&P 500 Index closed the week down 0.37%, the Eurostoxx 600 Index closed the week up 0.05%, whilst the MSCI Asia Pacific Index closed the week down 1.8%.1

COVID-19 Trends Improving in Europe

COVID-19 remains a key market risk, but data on infections in Europe have improved quite dramatically in the last couple of weeks, driven primarily by a turnaround in case numbers in the United Kingdom. Cases there surged through May and June at an alarming rate, but a combination of vaccination progress and herd immunity has seen those numbers start to dramatically reverse, and the impact of the vaccinations can quite clearly be seen when we look at the latest data on the demographic split of infections. The age group with the highest vaccination rate, those over the age of 70, saw only a modest increase in cases during the Delta wave, although cases among age groups who are unvaccinated or have seen lower levels of vaccination saw a sharp increase.

Crucially, there are no signs that the healthcare systems across Europe are struggling to cope, with hospitalisations remaining at relatively low levels despite the Delta variant. In Portugal, 96% of positive cases are of the Delta variant, whilst in Spain, it is 92% and in Italy 88%. An increase in the vaccination intensity in the European Union (EU) has helped. The number of patients needing intensive care is rising modestly in countries where the Delta variant is most prevalent—mainly the United Kingdom and Portugal. However, we are not seeing the bottlenecks experienced at the start of the year.

This all leads some to wonder whether the recovery rally in Europe has peaked for now.

Week in Review 


Last week was mixed for equity markets in Europe, with the focus firmly on second-quarter (Q2) earnings. Sector divergence was more notable than it has been of late. The Eurostoxx 600 Index closed the week near flat. Just over half of the Eurostoxx 600 Index companies have reported quarterly earnings so far, and it has been a positive earnings season overall. As noted, the signs on COVID-19 are improving in Europe and there is hope that the worst of the Delta wave may soon be over. Sector and stock composition drove most of the country-level index moves last week. The Italian FTSE MIB Index outperformed in Europe, up 1.0%, following strength in some of its key constituents. The German DAX lagged, down 0.8%, following underperformance from some of the German bellwethers.

In terms of sectors, the basic resources outperformed, up 3.7% on the week, despite losing 2.3% last Friday. The strength comes on the back of earnings beats for Anglo American and Arcelormittal. Strength in the sector in Europe came as the equivalent materials sector in Australia traded near all-time highs. Friday’s weakness came following a drop in iron ore prices and after a soft update from Glencore. Oil and gas stocks were also higher last week on the back of supportive earnings and higher oil prices. In terms of notable laggards, travel and leisure saw some healthy profit-taking, but the sector still awaits its next big catalyst. As infection rates improve across Europe, the Goldman Sachs Going Out basket finished the week up 0.7%, whilst the equivalent Stay at Home basket finished down 3.1%.2

We are just over halfway through earnings season and Q2 reporting has been strong. In Europe, 64% of companies which have reported so far have beaten earnings-per-share (EPS) expectations, a historically elevated level, but below the record high of 67% reached in the first quarter (Q1).3 The bulk of the strong earnings can be attributed to the rebound in energy stocks; 67% of companies have beaten on sales, leaving this on track to be the best season in terms of sales beats in over a decade. Revenue growth in Europe is also so far beating expectations.

The number of times “inflation” is mentioned in the earnings reports of Eurostoxx 600 companies has also increased sharply, with some media outlets stating it marks the biggest jump in the use of this term on record. At the sector level, inflation mentions are most prevalent among financials, consumer staples and materials.

United States

Despite upside corporate earnings surprises, US equities closed last week lower overall. The S&P 500 Index closed the week down 0.37%, the Dow Jones Index was down 0.36%, whilst the Nasdaq was down 1.1%. Tuesday was the weakest day for the Nasdaq in over two months amidst rising Chinese regulatory uncertainty. The Fed was in focus on Wednesday, but Powell’s commentary ended up being pretty much in line with expectations. Interestingly, while US equities held up well, CNN’s Fear and Greed Index moved into “Extreme Fear” territory last week, likely based on safe-haven demand, with high put buying and stock price breadth.

Last week was the busiest week of US Q2 earnings season and 296 of the S&P 500 companies have now reported. Q2 EPS is now tracking better than expectations, and EPS growth is now expected to exceed 80% year-over-year (y/y).4 US revenues have also been coming in higher than expected. Similar to Europe, mentions of “inflation” also accelerated in US earnings reports, including mentions of labour inflation, which points to increased wage pressure.

Eyes were on Powell’s press conference last week on Wednesday as investors sought any hints towards tapering; the lack of such language led to a relief rally in US equity markets. More details are expected at “coming meetings”. Other takeaways included: the Fed wants to see strong job numbers; inflation is running well above the 2% objective and will likely remain like that in the short-term; and Powell sees less economic impact with every wave of the virus, despite the still-unknown impact of the Delta strain. He also commented that “high inflation and high employment tend to go together”, but the US economy is in a transitory period with low employment numbers even though job vacancies are high. The job market is strong and is expected to pick up.

Asia-Pacific (APAC)

Last week saw notable underperformance for Asian equities as weakness in mainland China as well as Hong Kong equities weighed on the region. The MSCI Asia Pacific Index traded down 1.8% on the week.

Hong Kong’s equity benchmark was down 5% and stocks in Shanghai were down 4.3% last week amid a continuation of the recent crackdown by Chinese authorities on technology stocks. Of note, we saw China’s US$100 billion private education industry targeted by authorities, who announced a broad set of reforms. In addition, the Chinese Ministry of Industry Information Technology targeted a number of China’s largest technology companies, including Alibaba and Tencent, directing them to carry out internal reviews and address issues such as data security.

This follows on a number of other recent measures from Chinese authorities—such as targeting Didi a few weeks ago—so sentiment in this space was already brittle. As a result, we saw aggressive selling of tech names last week. For example, last Tuesday when markets moved lower, the overall volume for Hong Kong’s exchange was HK$361 billion, the highest on record. Significant value has been lost in Hong Kong and Chinese equities over July, around US$1.5 trillion, according to Bloomberg.5 In the United States, the Nasdaq Golden Dragon China Index (basket of US Chinese technology listings) fell 22% in July, its biggest monthly fall since 2008.

Meanwhile, Japanese equities fell 1% but still outperformed regional peers. Some suggest this may be a so-called “safe haven” play, given the issues with Chinese equities.

South Korean equities declined 1.6%, but it is worth noting a positive geopolitical development, as South and North Korea agreed on reactivation of inter-Korean hotline, helping the steel and construction sectors outperform.

Week Ahead

Macro Highlights

The Bank of England (BoE) is likely to steal all the economic headlines in Europe this week. The central bank is set to unveil new forecasts and formally adopt negative interest rates as a policy tool. It’s almost certain to keep policy on hold. Outside of that, Germany’s industrial output and factory orders data for June will offer additional detail on the extent to which the sector is being hampered by supply chain issues.

Monday 2 August

  • Spain manufacturing Purchasing Managers’ Index (PMI)
  • Italy manufacturing (PMI)
  • France manufacturing PMI
  • Germany manufacturing PMI
  • US manufacturing(PMI)
  • China Caixin PMI
  • Japan PMI, consumer confidence

Tuesday 3 August

  • Spain unemployment change
  • Eurozone producer price index (PPI)
  • US factory orders
  • Japan Consumer Price Index (CPI)

Wednesday 4 August 

  • France budget balance year-to-date
  • UK official reserves changes
  • Eurozone retail sales
  • US ADP employment

Thursday 5 August

  • France industrial production (IP)
  • BoE rate decision
  • Germany factory orders
  • UK new car registrations
  • US jobless claims & trade balance

Friday 6 August     

  • Germany IP
  • Spain IP
  • Italy IP
  • France trade balance & current account balance
  • US July employment report

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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 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.

3. Source: Refinitiv, as of 27 July 2021. There is no assurance any estimate, forecast or projection will be realized.

4. Source: Refinitive, as of 27 July 2021. There is no assurance any estimate, forecast or projection will be realised.

5. Source: Bloomberg, “China state media seeks to calm investor nerves after stock rout”, as of 27 July 2021.

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