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 quiet summer trading volumes for many markets and with corporate earnings season ending, there was less news flow, too. In that context, the path of least resistance appeared to be upwards, with European and US stock market indices grinding up to new all-time highs. On the week, the MSCI World Index traded up 0.9%, the STOXX Europe 600 Index up 1.2%, S&P 500 Index up 0.7%, while the MSCI Asia Pacific Index was unchanged.1

European Outlook into Year End

With European markets some 20% higher year-to-date (YTD), thoughts naturally turn to what we can expect into year end, given we have had such a strong start to the year. In addition, after 10 days of gains for the STOXX Europe 600 Index, we are starting to see some overbought conditions on some technical measures; for example, the Eurostoxx 600 Relative Strength Index (RSI) is now at 70.5, with 20% of the index components overbought, the highest level this year.2

With that in mind, we have read a number of positive research reports from various market constituents in regards to Europe’s outlook. The big picture generally appears positive, but risks include the Delta variant and supply-side problems.

Despite the strong performance this year from European equities, it seems many investment banks still see further gains for European equities into year end, with a robust economic recovery underpinning strong corporate earnings. Risks do remain, but it seems most are comfortable looking through these. German elections are coming up in September, so there is event risk in coming months to keep in mind.

The Week in Review


It seems the adage of “never be short a quiet market” held true recently as European equities saw their tenth consecutive all-time high, their longest run of record high sessions since 1990. The STOXX Europe 600 Index ended last week up 1.2%, with Italy’s equity benchmark up 2.5% and Swiss equities up 2.3%, leading the way higher. These indices were helped by outperformance of insurers and banks, thanks to the move in yields. However, with many market participants out on summer holidays, market volumes have been low—often down 25%-30% on recent averages—with last week being one of the quietest weeks of the year in terms of European market trading volumes.

Looking at macro data last week, the most notable data point was the weaker German ZEW sentiment survey. The August ZEW investor expectations survey came in at 40.4, and the Current Conditions Index at 29.3, both lower than expected, suggesting concerns over the Delta variant weighed on sentiment.

In the United Kingdom, gross domestic product (GDP) for the second quarter (Q2) was in line with expectations, coming in at 4.8% quarter-on-quarter, the third-highest quarterly growth since 1955. It is worth noting expectations for third-quarter (Q3), growth are lower (at 2.4%) as the Delta variant wave in July impacted activity.

Capital markets were extremely quiet last week with so many market participants on holiday. However, it feels like we are in the calm as the eye of the hurricane passes over. The European deal pipeline is going to be extremely busy again come September and we will start hitting the lock-up expiries for the initial public offerings (IPO) from the first half of the year

United States

US equity markets hit new all-time highs last week as stocks pushed on amidst low volumes. The S&P 500 Index closed at 4468, up 0.7% for the week. The Dow Jones Index outperformed, up 0.9%, whilst the Nasdaq was the relative laggard, up 0.2%. Stocks have ground higher during the narrow summer trading, helped by a rapid pace of earnings growth for America’s largest companies. Sector performance was mixed last week, but materials outperformed on the week, helped by progress in the Senate on the infrastructure bill. Consumer staples and financials were also strong. The energy sector was the only sector to finish in the red last week. Meanwhile, technology, consumer discretionary and real estate investment trusts (REIT) all finished near flat.

Nearly all of the S&P 500 companies have released quarterly earnings, and reports show more than 80% have topped projections, and earnings have beaten expectations by about 16%, as of this writing. Overall, second-quarter expectations are for revenues and earnings growth of 25.7% and 86.8%, respectively, as companies have been beating on both revenues and earnings-per-share (EPS).3

The US infrastructure bill remains a focus for equity markets, and it edged closer last week. On Tuesday, the Senate passed a bipartisan bill of around US$1 trillion by a vote of 69 to 30, which included US$550 billion of new spending. The bill includes US$110 billion for US roads; US$73 billion on clean energy sources; and US$65 billion on implementing high-speed internet in rural or low-income communities. The deal is not yet finalised and needs to be voted on by the House before it can be signed into law; Speaker Nancy Pelosi had said the House will not take up the matter this month, instead focusing on the US$3.5 trillion budget resolution. However, nine moderate House Democrats have signed a letter to Pelosi threatening to withhold support from a US$3.5 trillion budget blueprint until a bipartisan infrastructure package is signed into law. “It’s time to get shovels in the ground and people to work,” the Democrats wrote in the letter, dated 12 August. The moderates’ stance risks unraveling Pelosi’s plans to bring the budget resolution to a vote in the House the week of 23 August. Pelosi’s slim margin of control means she can only afford to lose three members of her caucus in a vote on the budget.

Rhetoric on tapering by the Federal Reserve (Fed) members continued last week. Atlanta Fed’s Raphael Bostic (voter) said that he is in favour of starting to hike interest rates in 2022, but could back a September taper decision if jobs growth proves to be explosive. Boston Fed’s Eric Rosengren (non-voter) called for tapering by the end of the year as he stated that bond buying is no longer helping to create jobs but is driving up house and car prices. Kansas Fed’s Esther George (non-voter) agreed, as she sees it as a time to “dial back the settings”. Meanwhile, Dallas Fed’s Robert Kaplan (non-voter) called for gradual, balanced tapering starting soon.

In terms of macro data, there was much anticipation about the US Consumer Price Index (CPI) print. However, it was something of a non-event as the data was very much in line with expectations, with the headline reading up 0.5% month-over-month and up 5.4% year-over-year. The University of Michigan Consumer Confidence survey was weaker than expected, at 70.2, suggesting concerns over the Delta variant are weighing on sentiment.


Asian equities underperformed their peers in the other regions last week, with the MSCI Asia Pacific Index closing down six basis points (bps).4 Concerns over regulatory curbs in China continue to dominate, with weakness in the technology sector behind the region’s underperformance as the government has signalled more regulation in coming years. The sector led the way lower in Asia. Nonetheless, Chinese equities outperformed in the region, with the Shanghai Composite Index closing the week up 1.7%. Australian equities were up 1.2% despite weaker iron ore prices on the back of disappointing Chinese import data. South Korean equities lagged on the week, down 3%, with confirmed COVID-19 infections hitting a new high there on Tuesday.

COVID-19 trends in Asia continued to worsen last week. Cases in South Korea rose to a record 2,200 last Tuesday and there are concerns that the outbreak there could be exacerbated by the long weekend. The Japanese government is likely to extend the state of emergency this week as daily cases there top 20,000. In Australia, the government has extended the lockdown in Melbourne, alongside Sydney which is in its eighth week of lockdown. The picture appears to be improving in China, where local cases have fallen for four straight days and as regional health authorities aim to end the outbreak by the end of August.

This morning’s Chinese macro data disappointed. Industrial Production (IP) for July was up 6.4% year-on-year, which was lower than anticipated amid continued disruption from recent flooding and Delta variant outbreaks. Retail sales were up 8.5%, but also missing expectations with the outlook challenged given further COVID-19 outbreaks hitting services and travel sectors this month.

The Week Ahead

This week, the focus in Europe from a macroeconomic perspective is the Eurozone Consumer Price Index (CPI) report on Wednesday, with inflation trends and expectations a key market driver in recent months. The Eurozone GDP report on Tuesday will also be in focus. In the United Kingdom, employment figures are due on Tuesday, followed by the CPI report on Wednesday and retail sales on Friday—all of which will be closely watched.

Outside of Europe, US retail sales, industrial production and housing starts are expected to garner attention through the week. The FOMC is also due to release its minutes from July’s meeting on Wednesday, where no changes were made to the policy decision. The minutes are likely to show that the committee are divided on the timing of tapering.

Monday 16 August

UK house prices
Japan GDP
US empire manufacturing
China IP, retail sales

Tuesday 17 August

UK unemployment rate, weekly earnings
Eurozone construction output, employment, GDP
US retail sales, IP, manufacturing production, capacity utilisation, business inventories

Wednesday 18 August

UK CPI, Retail Price Index (RPI)
Eurozone CPI
US housing starts
Japan trade balance
FOMC meeting minutes

Thursday 19 August

Switzerland exports/imports, industrial output
Eurozone current account
US initial jobless claims, leading index

 Friday 20 August

UK consumer confidence, 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. Source: Bloomberg.

3. There is no assurance any estimate, forecast or projection will be realized.

4. One basis point is equal to 0.01%.

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