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

After a steady grind higher through the summer, global equities stumbled last week as several headwinds weighed on sentiment. Concerns over the negative impact of Chinese regulatory crackdowns hit a number of sectors, the Federal Reserve’s (Fed’s) July meeting minutes and rising concerns over the spread of the Delta COVID-19 variant were all cited as reasons for a pullback. The MSCI World Index traded down 1.4% last week, the S&P 500 Index was down 0.6%, the MSCI Asia Pacific Index was down 4.4%, and the STOXX Europe 600 Index was down1.5%.1

Chinese Policy Creates Uncertainty

Commentary from the Chinese authorities has been a major headwind. This has been impacting Asian equities for some time, but last week saw other regions impacted, too.

The technology sector remains in focus, with Tencent warning investors to expect more regulatory curbs and further noise today around data protection. However, it was the luxury space where the greatest pain was felt, and sharp losses were noted after President Xi Jinping talked about a vision of “common prosperity” that includes income regulation and redistribution. In Asia, Prada traded down 23% over the past two sessions. Luxury names in Europe were also hit hard mid-week before stabilising somewhat on Friday. Moves were painful, with Burberry down 14%, LVMH down12%, and Kering also down 17%, for example. From a European perspective, the luxury space has some of the largest market capitalisations in the region and positioning is crowded, so moves can be exacerbated.

Beverage names also came under pressure on reports Chinese regulators will hold a meeting on the liquor market, which also plays into Xi’s plan to promote healthier lifestyles. Basic resources have also suffered, with iron ore down 8% last week on concerns over China cutting steel output in the second half of this year, plus a gloomy demand outlook and stronger US dollar.

The start of this week brought some respite for the luxury space, with some analysts highlighting that while the market is focused on the potential for higher taxes, a key target of China’s common prosperity goal is to grow the middle class and that would ultimately be a driver of growth for the luxury sector.

Fed in Focus

Another reason cited for the market pullback last week was the publication of the July Fed meeting minutes. Most participants noted that provided the economy were to evolve broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year—because they saw the committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal. However, there were caveats around uncertainty from the Delta variant, with any participants expressing uncertainty about the economic picture, citing a stalling in immunisation progress and developments surrounding the Delta variant as potential threats.

There were clearly vocal hawks, as some participants indicated that the committee should start preparing to limit the pace of its asset purchases as soon as possible.

All eyes will now be on Fed Chair Jerome Powell’s speech at the Jackson Hole conference this week on Friday, as some anticipate he will give a clear outline for the Fed’s tapering plans. This will be a key risk event for the coming week as the Fed has three more meetings left in 2021: 22 September, 3 November and 15 December. These will be key dates for the market to watch going into the year-end and some market commentaries we’ve read seem to indicate November might be the ideal time to taper.

How much the spread of the Delta variant and any potential negative economic impact plays into the Fed’s thinking will be a key factor, as US cases have risen steadily since the last Fed meeting.

Context Is Everything

While some of the mid-week moves lower in equity markets felt painful, it is important to keep these moves in context. European and US equities have been sleep-walking higher to new all-time highs through the summer on low trading volumes. So, a dose of reality was perhaps overdue as the march higher in Europe and the United States has been fairly unrelenting, although the divergence for Asia equities has been stark.

The Bank of America fund managers’ survey came out last week and highlights some interesting trends in the respondents’ macro and market outlook. Global growth expectations fell sharply, with a net 27% saying the global economy will improve, its lowest since April 2020. Despite this, equity allocation has held up, suggesting the TINA—”There is no Alternative to Equites”— remains in play.

Forthcoming German Elections

For European equities, it is important to keep an eye on the upcoming German election on 26 September. German Chancellor Angela Merkel’s CDU/CSU party union2 has lost a lot of ground in polls recently, as the public responded negatively to their handling of recent floods. With that, the outcome of the election is unclear, creating uncertainty for investors as Merkel, who steps down in September, has her heir apparent in frontrunner Armin Leschet.

However, ratings for the centre-left Social Democrats (SPD) have moved higher and the Greens support appears to have stagnated. As it stands, it is hard to see a two-party government that would have a majority, so a messy three-party solution looks likely.

From a market perspective, in our view, potentially the most negative outcome would be a leftish coalition of the Greens, the SPD and the hard-left Left Party.

There is still a month until the election, so plenty of time for polls to change, but something we need to keep on the radar in September when we already have potential headwinds from Fed tapering and the Delta variant wave.

The Week in Review


European equity markets awoke from their summer slumber to record one of their worst weeks this year, as the STOXX Europe 600 Index closed the week down 1.5%. Concern over a widening of China’s regulatory crackdown was the main driver behind the weakness. Rising COVID-19 cases in the United States and Asia also impacted sentiment through the week, which led to “Stay-at- Home” stocks outperforming reopening plays. Weaker macroeconomic data also helped drive the risk-off moves.

As noted, Fed meeting minutes were also in focus last week as investors sought any further indication on tapering. The July minutes were pretty much in line with recent Fed speak, which would be some form of tapering later this year assuming the economic recovery evolves broadly as anticipated.

In line with the risk-off theme, defensive stocks were favoured over cyclicals last week. Despite the new catalysts, market volumes continued to trend at extreme lows—this month could potentially be the worst August for volumes this century. Volatility in Europe was high last week, with the V2X Index having hit 25 early on Thursday, back near six-month highs.

Sector performance dispersion was notable last week, with defensives favoured, Utilities, the year-to-date laggard in Europe, outperformed. Naturally, health care and telecoms were also among the outperformers on the week. Meanwhile, basic resources stocks lagged; a selloff in commodity prices throughout the week was driven by a strong US dollar and Chinese data showing waning demand and an increased supply outlook. China’s steel consumption is expected to soften in the second half of the year, especially in the construction sector, due to tightening property policy.

Automobile stocks were also weak in Europe, with sentiment in the space taking a hit after Toyota announced a 40% cut to production in September due to a worsening chip shortage. As discussed, the luxury space was badly hit after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that includes income regulation and redistribution, with EU luxury stocks closing the week lower as a whole. This news hit the retail sector, which also declined last week.

Sector composition mainly drove country-specific index performance. Spain’s IBEX outperformed last week, albeit down 0.9%, and helped by its weighting in utilities. Germany’s DAX closed the week down 1.1%, with its big tech and chemicals weightings balancing out a poor week for autos. The Italian FTSE MIB struggled on the week, down 2.8%, despite its large utilities weighting, driven primarily by the struggling luxury names. And it was a similar story for the regional laggard, Spain’s CAC 40, which closed down 3.9%, given its heavy luxury weighting.

United States

After making all-time highs the prior week, US equities paused for breath last week amid the aforementioned headwinds. The S&P 500 Index ended the week down 0.6%; however, it was the move lower in the Russell 2000 Index, down 2.5% last week, that garnered the most attention as it fell through its 200-day moving average (a key technical indicator) for the first time since 2020. It did end the week just above this support level, but the move lower is taken as an indicator of the nerves over the spread of the delta variant and potential Fed tapering.

In terms of sector performance, there was a defensive tilt to the outperformers with utilities and health care higher, while energy and materials closed lower.

Looking at macro data, US retail sales came in at -1.0%, missing estimates as the resurgence of the pandemic had a negative impact.


Last week was tough for Asian equities with the MSCI Asia Pacific down 4.4%. The week got off on the wrong footing with poor Chinese macro data; industrial production for July was up 6.4% year-over-year (Y/Y), but that figure was weaker than expected amid continued disruption from recent flooding and Delta-variant outbreaks. Retail sales were up 8.5% but also missed expectations, with the outlook challenged given further COVID-19 outbreaks hitting the services and travel sectors this month.

As discussed above, Chinese government rhetoric weighed on a variety of sectors including basic resources, luxury and technology. On the back of this, we saw Hong Kong’s Hang Seng Index enter bear market territory as it has traded down 20% since its February peak.

COVID-related headlines in the region were mostly negative, with Australia struggling to get a grip on the recent outbreak of new cases in Sydney and New Zealand entering a lockdown after an Auckland outbreak. In Vietnam, Ho Chi Minh City entered a two-week lockdown. On the flip side, it was positive to see China reporting zero locally transmitted cases today (23 August).

One impact from the COVID-19 restrictions in China is a major shipping bottleneck. China’s ports have been shut down or restricted due to COVID—China has eight of the 10 busiest ports in world, and they are running at well below normal capacity because of the restrictions. The knock-on impact on the global supply chain could be significant, and shipping costs have soared.

The Week Ahead

Macro Week Highlights

As discussed, Fed Chair Powell’s commentary at the Jackson Hole conference will likely be a key catalyst for equity markets this week. Elsewhere, the spread of the Delta variant and bottlenecks in global supply will be important drivers for sentiment. Commentary from Chinese authorities will be closely watched after the fallout last week.

Key Events

Monday 23 August: Euro Area Flash Composite Purchasing Managers Index (PMI); UK Flash Composite PMI

Wednesday 25 August: Germany Ifo Survey

Thursday 26 August: European Central Bank Monetary Policy Accounts

Monday 23 August

UK: Markit/CIPS UK Services PMI; Markit/CIPS UK Composite PMI; Markit UK PMI Manufacturing SA

US: Chicago Fed Nat Activity Index; Markit US Manufacturing PMI; Markit US Services PMI; Markit US Composite PMI; Existing Home Sales; Existing Home Sales month-over-month (M/M)

France: Markit France Manufacturing PMI; Markit France Services PMI; Markit France Composite PMI

Germany: Markit/BME Germany Manufacturing PMI; Markit Germany Services PMI; Markit/BME Germany Comp PMI

Eurozone: Markit Eurozone Manu PMI; Markit Eurozone Services PMI; Markit Eurozone Composite PMI; Consumer Confidence

Tuesday 24 August    

US: Richmond Fed Manufacturing Index; New Home Sales; New Home Sales M/M

Germany: Gross Domestic Product (GDP); Private Consumption quarter-over-quarter (QoQ); Import Price Index

Wednesday 25 August  

US: MBA Mortgage Applications; Durable Goods Orders; Durables Ex-Transportation; Cap Goods Orders Nondefence Ex Air; Cap Goods Ship Nondefence Ex Air

Germany: IFO Expectations; IFO Current Assessment; IFO Business Climate

Thursday 26 August   

US: Initial Jobless Claims; GDP Annualised Q/Q; Continuing Claims; Personal Consumption; GDP Price Index; Core PCE Q/Q; Kansas City Fed Manufacturing Activity

France: Business Confidence; Manufacturing Confidence

Germany: GfK Consumer Confidence

Italy: Industrial Sales M/M; Industrial Sales WDA Y/Y

Friday 27 August      

US: Advance Goods Trade Balance; Wholesale Inventories M/M; Retail Inventories M/M; Personal Income; Personal Spending; Real Personal Spending; University of Michigan Sentiment  

France: Consumer Confidence

Germany: Retail Sales M/M; Retail Sales NSA Y/Y

Italy: Consumer Confidence Index; Manufacturing Confidence; Economic Sentiment

Spain: Total Mortgage Lending Y/Y; House Mortgage Approvals Y/Y

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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. CDU/CSU, unofficially is the union parties’ political alliance of two political parties in Germany: the Christian Democratic Union of Germany (CDU) and the Christian Social Union in Bavaria (CSU).


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