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 higher last week, with each major region trading in the green. Europe’s STOXX 600 Index outperformed, closing the week up 1.8%, while the S&P 500 Index closed the week up 0.9% and the MSCI Asia Pacific Index closed up 1.4%.1 The focus for investors remains on the latest round of corporate earnings, which continue to show upgrades to estimates. Macroeconomic releases were mixed through the week, but still showed strength.

Last week, the Bank of England (BoE) announced signs of a path to tapering. Also, the US monthly employment report was closely watched as usual, with July nonfarm payrolls coming in at 943,000, beating expectations. Interestingly, there was a risk-off theme to global fund flows last week with the greatest amount going into cash, while gold flows were also notable.

COVID-19 Concerns on the Rise Again

It had seemed like COVID-19 trends in Europe were showing signs of progress, but last week brought further concerns about infection rates in the United States and Asia. Cases are trending higher in the United States as the country fights the Delta variant. Meanwhile, countries across Asia continue to see sharp rises in cases, causing renewed shutdowns.

On Friday 6 August, the United States recorded over 100,000 COVID-19 cases for the first time since February 2021. Even more worryingly, hospital admissions increased 40% in the space of a week, bringing strain to the healthcare system in some hotspots. Hospitalisations and deaths are skewed largely to the unvaccinated as the Delta variant is spreading quickly. The state of Mississippi has been particularly hard-hit, and we saw reports of only eight free intensive care unit (ICU) beds in the entire state on Thursday of last week.

US government focus is on areas where vaccination rates are low. There has been a recent uptick in vaccines being administered, with states such as Tennessee seeing a 90% increase in jabs over the last two weeks. A number of US companies have announced they will be requiring employees to be vaccinated ahead of any return to the office.

COVID-19 cases are also on the rise across Asia. Concerns about a potential outbreak in China have resulted in a tightening of restrictions there. Reported cases in China remain relatively low; however, the Delta variant is active and has been detected in the major cities. The country has gone into testing overdrive as the Chinese government tries to contain the most recent spread and Hong Kong also began to tighten restrictions again. Many companies in the region have begun to rethink their return-to-office projections.

Meanwhile, commodity prices took a hit following the news of increased restrictions in China. West Texas Intermediate crude oil closed last week down 7.7%, whilst copper was down 3% and iron ore down 5.1%.

The picture does appear to be improving in Europe for now, with vaccination rates high in the United Kingdom and continuing at a good pace across the eurozone. The United Kingdom has vaccinated 75% of its adult population, outpacing Spain, France, Italy and Germany.2 There continues to be no real signs of excessive strain on healthcare systems across Europe; however, ICU bed usage has seen an uptick in the past week. In the United Kingdom, where the Delta variant was rampant a few weeks ago, infection rates are dropping and hospitalisations and deaths remain at relatively low levels.

Schools are due to return from summer holidays over the next few weeks so that will be the next test for managing the spreads among a predominantly unvaccinated group.

The big question is what this all means for the global economy. Some analysts see a continued economic resurgence as herd immunity is reached amid the rise in cases and vaccination rates, while others see the recent rise in the COVID-19 cases stalling growth.

Week in Review


European equities traded higher overall last week amid a heavy week of corporate earnings, with the STOXX Europe 600 Index up 1.8%. Around 75% of European companies have now reported quarterly earnings, with 67% beating estimates on earnings-per-share (EPS), so the picture remains largely supportive. Outside of earnings, the BoE announcement last Thursday was a focus, but came in largely in line with expectations. In terms of the country indices, the French CAC 40 Index outperformed (up 3.1%), following strength in some of its key constituents; the UK FTSE 100 Index lagged despite sterling weakness and energy sector strength, but still finished up 1.3%.3

For the second week running, the Goldman Sachs Going Out basket (up 3.2%) outperformed the equivalent Stay at Home basket (down 0.9%), as countries around Europe move closer to relaxing COVID-19-related restrictions. Over the course of last week, cyclicals marginally outperformed defensives. In terms of sectors, the banks, oil and gas and financial services were all strong, while the travel and leisure sector struggled but still posted a minor gain. In terms of the laggards, food and beverage and basic resources stocks finished in the red.

Last week, BoE kept its key interest rate at 0.1%. The committee also voted by a 7-1 majority to maintain its current asset-purchasing programme at £895 billion. Policymakers believe that inflation will now peak higher than expected around the 4% level. Despite the hawkish tilt to the announcement, officials stated that the hiking cycle and unwinding holdings of £900 billion of government bonds would be modest and at a gradual pace.

Interestingly, on UK fiscal spending, the Financial Times reported on Friday that there are growing tensions between UK Prime Minister Boris Johnson and the Chancellor Rishi Sunak. The article notes that Johnson seems content with spending more, whilst Sunak frets about possible rising inflation and interest rates, which would pile on the costs of servicing the UK’s £2.2 trillion debt.4

United States

US equities continued their march higher last week, with the S&P 500 Index making new all-time highs and ending the week up 0.9%. There were similar gains for the Dow Jones Index (+0.8%), Nasdaq (+1%) and Russell 2000 Index (+1%). Although many market participants were out on vacation, there was plenty to focus on last week. With the market firmly focused on the Federal Reserve (Fed) policy at the moment, Friday’s July employment data was the main talking point as Fed Chair Jerome Powell has said the labour market is key to the Fed’s decision on tapering.

The July employment data was strong, with 943,000 new non-farm payroll jobs added.  There was also a sharp drop in the unemployment rate to 5.4%, which was stronger than anticipated and better than the June reading of 5.9%. With a tighter labour market, there were signs of wage inflation as average hourly earnings rose 4.0% year-on-year (Y/Y), also higher than expected and higher than the previous reading of 3.7%

In terms of other key reports, earlier in the week the Institute of Supply Management (ISM) service figure was also strong at 64.1, which was likewise better than expected.

Given the stronger data, pressure will inevitably grow on the Fed to outline plans to taper its quantitative easing (QE) programme. There were a few interesting comments from Fed speakers last week. Fed’s Christopher Waller (voter) said: “My outlook is very much that the economy’s going to recover. We will potentially be able to pull back our accommodative monetary policy potentially sooner than others may think.”5 In addition, after the US employment data, Kaplan (non-voter) called for a gradual, balanced tapering to start soon.

In this context, all eyes are on the central banker conference on 26-28 August in Jackson Hole, Wyoming, as a platform for a potential outline of tapering plans.

With the strong employment print we saw value sectors outperform, with financials strengthening last week thanks to rising bond yields. In addition, the stronger data last week helped eased concerns we are at “peak growth”, further supporting value sectors. The defensive consumer staples sector lagged, down last week.

Aside from the macro news, corporate earnings remain a focus. As it stands now, we have seen a strong second-quarter earnings season. With more than 400 companies reporting results, the majority have beat both earnings and sales expectations. The largest beats have been in the consumer discretionary and financials spaces.

Finally, we note that investment-grade credit yields are at record tight levels, showing no sign of concern in the credit market despite the run equity markets have had to current all-time highs. As ever, it is important to keep an eye on credit markets as they are a good barometer for sentiment.


Last week saw some respite for Asian equity markets after a tough time recently, and the MSCI Asia Pacific Index traded up 1.4%. The focus was on China with so much noise around the government’s recent crackdown on technology stocks. Officials did soften their stance a little last week, for example, a scathing article on the Chinese video gaming company Tencent, was softened and the description of gaming as “spiritual opium” was removed.6 There was also some reassuring macro data as China’s Caixin services Purchasing Managers’ Index (PMI) rose to 54.9 in July from 50.3, putting the composite at 53.1, up from 50.6. With that, Chinese stocks trading in Shanghai were up 1.8% last week and Hong Kong’s major benchmark was up 0.8%. Other indices in the region performed well too, with the Nikkei Index up 2%, KOSPI up 2% and the ASX up 2%.

Earnings season dominates in the region as well. In Japan, the majority of companies in the TOPIX index that have reported so far have also beat earnings-per-share estimates.

In South Korea, July export data came in at 29.6% year-over-year. Total exports rose for nine straight months and have risen over 20% for four back-to-back months for the first in 10 years.

Despite a better week for Asian equities, they still lag their global peers year-to-date.

This Week’s Highlights

So far this week, we’ve had the latest producer price index (PPI) and Consumer Price Index (CPI) readings out of China. The PPI grew 9%, quickening from 8.8% in the previous month and beating consensus. Consumer prices also topped estimates with a 1% rise.

Key Events Ahead

Tuesday 10  August: Germany ZEW survey

Thursday 12  August: UK gross domestic product (GDP) quarter-on-quarter; euro-area Industrial Production (IP) month-on-month

Monday 9 August

  • Germany trade balance & current account balance
  • US JOLTS job openings
  • China CPI & PPI

Tuesday 10 August

  • Germany ZEW survey
  • US National Federation of Independent Business (NFIB) Small Business Optimism
  • US unit labour costs
  • US nonfarm business productivity
  • Japan trade balance

Wednesday 11 August 

  • Germany CPI
  • Italy CPI
  • US CPI
  • US federal budget
  • Japan machine tool orders

Thursday 12 August

  • UK GDP, trade balance and government spending
  • UK IP, manufacturing production
  • UK RICS house price balance
  • Italy trade balance
  • Eurozone IP
  • US jobless claims
  • US core PPI
  • Japan PPI

Friday 13 August     

  • France ILO unemployment rate
  • France CPI
  • Spain CPI
  • Eurozone trade balance
  • US import price

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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. Sources:, Reuters COVID-19 tracker, as of 4 August 2021.

3. Indices are unamanged 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.

4. Source: Financial Times, “Tensions rise as Sunak and Johnson prepare for autumn spending tussle”, 6 August, 2021.

5. Source: Reuters, “Fed’s Waller says accommodative policy may be pulled back sooner than expected”, 5 August 2021.

6. Source: South China Morning Post, “Chinese newspaper publishes, and then deletes, report that called video gaming ‘spiritual opium’, hitting Tencent stocks”, 3 August 2021.

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