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 generally declined last week as markets became a little more bearish. The MSCI World Index closed the week down 1.3%, and regionally, the S&P 500 Index closed the week down 1.7%, the STOXX Europe 600 Index closed down 1.2%, whilst the MSCI Asia Pacific Index outperformed again, up 0.8%.1

Factors behind the weakness last week included concerns that we may have reached peak growth, COVID-19 infection rates, tax hikes, further Chinese interventionism, the sharp increase in placings, and hawkish central bank rhetoric. Also, we are seeing the busiest start to a month in terms of equity offerings since 2012. The bearishness could also be seen in the fund flow data, with cash funds seeing a US $15.2 billion inflow, the most in five weeks. The CNN Fear and Greed Index has now slipped back into “Fear” territory from “Neutral” one week ago.2

Market Bearishness

Last week, markets appeared to be on the lookout for negatives. Whilst there wasn’t one overarching driver behind the weakness, a number of factors contributed.

Peak growth: There is a wide-held view in global markets that we are now past peak economic growth as the global economy recovers from an unprecedented downturn. Despite recent economic data that missed expectations—for example, last week’s UK gross domestic product (GDP) and German ZEW Survey—economic data generally remain strong.

However, the question is whether a peak in economic growth means a peak for equity markets. Equity markets are at, or are close to, all-time highs. As of this writing, the S&P 500 Index is up approximately 18.7% year-to-date and inflows into equities remain resilient. As macroeconomic data continues to normalise, there is less catch-up potential now, causing many to downgrade estimates for growth.

Central bank hawkishness: The European Central Bank (ECB) meeting last week came and went without too much fuss. A “moderately lower pace” of net asset purchases under the pandemic emergency purchase programme (PEPP) was largely in line with expectations. The ECB’s balance sheet has grown by €3.5 trillion since March 2020.

However, the dovish tone at the ECB was not matched last week by rhetoric from the Bank of England (BoE) or the Federal Reserve (Fed). BoE Governor Andrew Bailey confirmed that policymakers were divided in August on whether conditions had been met to raise interest rates and sought more employment data before making the call to tighten.

We saw economists bring their expectations of a 25 basis-points (bps)3 hike by August 2022 forward last week. The Fed’s John Williams (a Federal Open Market Committee voter) said that his outlook had not changed, despite the payrolls setback and that it could still be appropriate to taper this year. Atlanta Fed President Raphael Bostic (also a voter) agreed, supporting tapering this year and a quick wind-down.

Tax hikes: In the United Kingdom, ministers announced last Tuesday that National Insurance (NI) would rise by 1.25% to help the country tackle the backlog within the National Health Service (NHS) and to fund social care reform, breaking a Conservative Party pledge. The hike caused a bit of a storm in the media, with the opposition claiming the hike will hurt workers the most. Analysis by UK tax authorities said the changes would have a “significant” impact on economic factors such as earnings, inflation and company profits.

In the United States, House Democrats are set to propose new tax hikes to pay for the US$3.5 trillion spending package. The plan involves raising the corporate tax rate to 26.5% from 21%, a 3% surtax on incomes above US$5 million, raising the minimum tax rate on companies’ foreign income to 16.5% from 10.5%, and raising capital gains tax to 28.8% from 23.8%. On the back of the pandemic, tax hikes seemed inevitable; however, it is the extent and the speed at which they will be implemented that will be closely watched by markets heading into the new year.

German political uncertainty: Whilst the upcoming election in Germany isn’t likely to result in any radical policy shift, it does represent the end of an era for Europe’s largest economy. Current Chancellor Angela Merkel is stepping down, heralding a change for German politics. Heading into the 26 September election, the centre-right CDU/CSU,4 which has been at the forefront of German politics for 16 years, continues to trail the centre-left Social Democratic Party (SPD) in the polls. A shift away from the Union parties could not only change the landscape of politics in Germany, but in Europe too, where the country wields a lot of influence.

Week in Review


European equities tried to bounce off mid-week lows but still finished poorly, closing the week down 1.2%, with a few catalysts in play. The ECB meeting and announcement on Thursday was a key focus for markets, but the event passed without too much drama, in line with expectations. In this 2021 fiscal year, there was a record amount of paper that came to market in Europe with last week totaling US$6.7 billion. This brings the total so far in Europe to US$9 billion in September versus US$2.1 billion for the whole of August. Volatility spiked midweek in Europe last week but settled as the week went on.

In terms of factors, momentum stocks outperformed overall, up 1.9% in Europe, as investors moved to the recent winners. COVID-19 reopening stocks lagged again last week, down 2.9%, as concerns rumble on regarding the Delta variant as we head into the colder months.

Market volumes are still at very low levels, failing to make any significant bounce following the summer lull. Sector performance was mixed through last week with personal and household goods outperforming following some mean reversion for luxury stocks on the back of quieter Chinese interventionist newsflow in that space. Retail stocks weren’t far behind. In terms of the laggards, utilities and real estate stocks struggled as the threat of tapering increased through the week. Health care was the week’s underperformer following downgrades in the space.

In terms of macroeconomic data last week, eurozone second-quarter gross domestic product (GDP) was revised higher to 2.2% from 2% initially reported. That puts year-on-year (y/y) GDP growth at 14.3%, clearly magnified given a low base in the second quarter of 2020.

Elsewhere, German factory orders beat expectations in July, up 3.4% versus expectations for a 0.7% drop, but still down from 4.1% growth in June. New order growth in July was at the highest level since records began in 1991. The closely watched German ZEW survey declined in September, down to 26.5 versus a previous reading of 40.4. The survey said that whilst financial market experts continue to expect economic improvements, the expected magnitude of those improvements has been amended down significantly. Chip shortages and resource scarcity in construction continue to be key concerns.

United States

US equity markets drifted lower through the holiday-shortened week, with the S&P 500 Index ending the week down 1.7%, its biggest weekly drop since June, as a number of factors weighed on investor sentiment. The S&P 500 Index has closed lower on each of the past five sessions, and it now testing its 50-day moving average, a technical support level to keep an eye on. It is also worth noting that over the last decade, the S&P 500 Index has seen five straight down days 37 times and has been positive five days later on 33 occasions. Furthermore, it is important to keep in mind the S&P 500 Index had made all-time highs the prior week, so the index is still at lofty levels.

Upcoming “Quadruple Witching” Event: Aside from the factors discussed earlier that are weighing on sentiment, it is also worth noting one technical factor that may also have impacted market performance last week. This coming Friday is a quarterly “Quadruple Witching”, a day when index options, index futures, stock options and single stock futures expire, and we typically see huge market volumes as trades are repositioned. There is often heightened volatility ahead of these events, so this is something to keep in mind when considering recent moves and looking ahead to this week.

Looking at sector performance last week in the United States, the industrials saw the weakest performance as peak growth and supply concerns weighed. The health care sector also performed poorly after President Joe Biden’s administration announced plans to lower prescription drug prices. The best-performing sector was consumer discretionary, albeit still slightly weak.

Looking to politics, the wrangling over the Biden administration’s proposed US$3.5 trillion infrastructure bill continues as press reports continue to highlight the process is stalling due to the gap in headline spending preferences between moderates and progressives. In addition, it is worth noting the US has a “Debt Ceiling” deadline approaching in October, where the federal government will face shut down unless Congress approves a new ceiling. This deadline could be used as a bargaining tool by the Republicans in negotiations over the infrastructure bill, so something else for us to keep on the radar as prolonged uncertainty over this could spook investors.

It was a quieter week for US macro data, but the standout last week was probably US producer price index (PPI), which came in at +8.3% y/y.

Looking at new COVID-19 cases in the United States, there are signs the recent Delta wave has plateaued, as the number of daily new cases has drifted a little.

Asia and Pacific

Asian equity outperformance continued last week, helped by strength in Japan following Prime Minister Suga’s resignation the previous week. Japan’s Nikkei Index continued to rally, closing the week up 4.3%, and finishing at a two-month high. Meanwhile, the Tokyo Stock Price Index (TOPIX) rallied to a 30-year high. Suga’s decision not to run in the Liberal Democratic Party presidential election is helping risk appetite, with investors hopeful of a turnaround in the handling of the pandemic and a potential increase in economic packages.

Candidates are lining up for the election, with the reform minister, Taro Kono, currently leading the way in the polls. Another candidate, Fumio Kishida, said that an economic stimulus package worth “tens of trillions of yen” would be necessary to support Japan’s economy through the pandemic. This potential for extra stimulus was driving equity market moves last week.

Japanese equities were also helped as the GDP revision came in slightly ahead of expectations, with second-quarter GDP growth revised up to 1.9% annualized versus a previous figure of 1.3% and ahead of the consensus forecast. This means Japan has managed to avoid a double-dip recession.

Chinese equities were stronger despite another week of negative newsflow on regulation. One key driver may have been the better-than-expected trade data. Chinese customs exports rose 25.6% year-on-year in August, beating expectations. Imports also rose, up 33.1% year-on-year.

Nonetheless, there were further interventionist headlines last week, with Reuters reporting that the Chinese government was summoning gaming firms to instruct them to move away from their “solitary focus” on profit and prevent children under the age of 18 from becoming addicted to games.5 In Hong Kong, Tencent and NetEase combined lost more than US$60 billion in market capitalization on Thursday.

Week Ahead

Monday 13 September

  • Japan PPI inflation
  • Italy unemployment rate quarterly
  • Sweden unemployment
  • Germany Wholesale Price Index (August)
  • US federal budget

Tuesday 14 September

  • UK claimant count & ILO unemployment rate
  • Switzerland Producer & Import Prices
  • Spain Consumer Price Index (CPI)
  • Sweden CPI
  • US CPI

Wednesday 15 September

  • Japan core machine orders (month-on-month)
  • China Industrial Production (IP) (y/y)
  • UK CPI
  • Euro area IP
  • Norway trade balance
  • France CPI
  • Italy CPI
  • Italy general government debt
  • US Mortgage Bankers Association (MBA) mortgage applications (September), empire manufacturing (September), Import Price Index (August)

Thursday 16 September      

  • Japan trade balance adjusted
  • Netherlands unemployment rate
  • Italy trade balance
  • Eurozone trade balance
  • US jobless claims

Friday 17 September      

  • UK retail sales
  • Italy current account balance
  • Euro area final CPI inflation
  • US state employment

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On My Mind: Leaving QE, Never Easy 

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China: Red Moon Rising

China’s equity market saw strong performance in 2020 but has faced a setback this year amid regulatory tightening and other headwinds. The Franklin Templeton Investment Solutions team outlines current risks and opportunities of investing in China. Read More. 

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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. As of 13 September 2021. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. 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. One basis point is equal to 0.01%

4. 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).

5. Source: Reuters, “Chinese government summons gaming firms, says it will crack down on ride-hailing”, 8 September 2021.

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