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

Equity markets paused for breath last week as earnings season wound down and investors took stock of fresh inflation data. It was also a much quieter week in terms of central bank news flow, which has been a key catalyst in prior weeks. Towards the end of the week there was some focus on rising COVID-19 cases in Europe, which weighed on travel and leisure stocks. On the week, the MSCI World Index traded down 0.3%, the S&P 500 Index was down 0.3%, while the European Stoxx 600 Index  gained 0.7% and the MSCI Asia Pacific Index gained 0.8%.1

Week in Review

United States

After a sustained period of positive performance for US markets, there was a couple of consecutive down days last on Tuesday and Wednesday. Last week, the S&P 500 Index fell 0.3%, the index’s first weekly decline in six weeks, although still within a whisker of the all-time high set recently. It is worth noting that electric vehicle manufacturer Tesla was a notable drag on index performance as it traded down 15% after Elon Musk sold over US$5 billion of stocks during the week.

Inflation Remains Key

Strong inflation data raised fears that the Federal Reserve (Fed) is behind the curve and would need to take more hawkish action in the future. The October Consumer Price Index CPI made a 30-year high at +6.2%, which drove the 10-year Treasury yield up 11 basis points (bps)2 and undermines the “transitory” inflation argument. With that, inflation concerns remain front and centre, with US President Joe Biden commenting that “everything from a gallon of gas to a loaf of bread costs more. It’s worse even though wages are going up. We still face challenges.”  You would imagine comments from the White House only add to the pressure on Fed Chair Jerome Powell.

A further sign of how inflation is weighing on sentiment came last Friday with a weak University of Michigan consumer sentiment survey. The headline reading came in at 66.8, and the report’s 12-month inflation forecast was 4.9%, the highest since 2008. Of note, it stated “one-in-four consumers cited inflationary reductions in their living standards in November, with lower income and older consumers voicing the greatest impact.” Based on this survey, US consumer sentiment is now at a 10-year low.

It is interesting contrasting that cautious consumer picture around inflation with the CNN Fear & Greed Index, which remains in Extreme Greed territory.3

With earnings season and clarity around the Fed taper plan behind us, what are the next catalysts as we head into the US Thanksgiving and the quieter holiday season? The passage of the US social spending package through Congress will be a focus. Last week, Democratic Senator Joe Manchin was wary of the deal, noting that the threat posed by inflation to the American people is not transitory, and is instead getting worse. The implication being, he may not agree to new swathes of government spending in such an inflationary environment—another example of how omnipresent inflationary concerns are at the moment.

Geopolitics has to remain a focus for investors, with tension between the US/China and West/Russia simmering. However, it was announced that President Biden and Chinese President Xi Jinping will hold a virtual summit, so given the recent tension between the two countries, this news helped soothe some nerves.

Of note, retail investor appetite for the market remains strong and has been a key driver behind recent gains.

The Financial Times also noted the impact of retail investing, with 5 November being a record day for trading, with US$2.6 trillion worth of options changing hands in the US market, the highest trading volume on record.4 Much of this trading has been in call options, derivatives allowing investors to bet that asset prices will rise.

Another supportive factor for markets is the return of corporate buybacks, as the blackout period came to an end post earnings season, allowing buybacks to resume.


European equities were better off again last week, helped by investor positioning and better-than-expected earnings reports. The European Stoxx 600 Index closed near all-time highs, up 0.7% on the week. While the US stock market performance was relatively subdued, it was interesting to see European equities failing to succumb to the same pressures. There may be a few reasons why.

Firstly, European equities aren’t nearly as well-owned, with recent flows favouring the United States. Secondly, central bank policy is more supportive for European stocks, as the European Central Bank (ECB) continues with its relatively accommodative stance. Finally, third-quarter (Q3) earnings in Europe have beaten consensus estimates overall. Bloomberg shows US and European equities neck-and-neck in terms of earnings growth, so European stocks remain interesting to investors as they are not as crowded as their US peers.

In terms of sectors, the basic resources outperformed on the week. The sector was helped by news out of China that the government was taking steps to ease restrictions on the real estate market, which triggered some strength in metal prices later in the week.

Travel and leisure stocks were particularly weak, giving back all their gains (and then some) following the Pfizer announcement the previous week. Sentiment turned negative, as German one-day COVID-19 cases topped 50,000 for the first time and as lockdowns are threatened across western Europe.

European macro data showed signs of improvement last week. The German ZEW Expectations survey came in at 31.7 vs 20.0, while the EU Sentix Investor Confidence Survey also beat expectations, coming in at 18.3. And finally, UK gross domestic product (GDP) grew by more than expected, up 0.6%.

Russian equities came under pressure at the end of last week amid reports the United States warned Europe that Russia may be planning an invasion of Ukraine. Reports noted a build-up of Russian military near the Ukrainian border. Russia’s initial response was that military deployments on its own territory are an internal matter and denied any aggressive intentions. This does potentially strain relations between the United States and Russia even further. It appears to be another pain point in relations between Russia and the West, and with that, we saw decent selling in Russian equities at the end of last week.

A surge in new COVID-19 cases in some European countries has been a concern of late. Cases have surged to new highs in Germany, Austria, the Netherlands and Slovenia, although hospitalisations remain below previous peaks as vaccinations and booster jabs continue to have a marked impact on patients avoiding serious illness.

However, lockdowns remain a threat to Europe’s economic recovery. The Netherlands announced a three-week partial lockdown to tackle surging cases. The temporary rules mean that bars, restaurants and supermarkets will be required to close by 8 pm; sports events are to be played in front of empty stadiums; and workers are encouraged to work from home where possible. Austria announced that it will enforce lockdown on anyone who is unvaccinated to cope with its recent surge in cases.

Asia and Pacific

Asian equities saw some relative outperformance last week for a change, with the MSCI Asia Pacific Index closing the week up 0.8% following a late rally last Friday. The overall outperformance was driven by strength in the Hang Seng Index, up 1.8%, and the Shanghai Composite Index, up 1.4%.

The main story was around the potential dialling back of restrictions on the Chinese real estate sector. Local news reports suggested that regulators may adjust existing rules to allow real estate firms to sell debt in the domestic interbank market. Other state media outlets confirmed that state-run banks had boosted lending to the sector last month. Chinese property developer Evergrande avoided default again last week after making an overdue interest repayment on a dollar bond.

Chinese inflation rose last week. Factory gate prices rose at their fastest pace in 26 years in October, as fuel shortages and rising commodity prices hurt supply. The Producer Price Index rose 13.5% compared to October 2020, higher than anticipated and the highest since 1995. Consumer price inflation also quickened, with the CPI 1.5% higher than at the same point a year ago, compared to 0.7% in September.

After some strong gains post the general election, Japanese equities were unchanged last week. Prime Minister Fumio Kishida did unveil some details of the fiscal package/stimulus headlines of c. ¥30 trillion (in line with previous pledge/reports), but some investors were disappointed the ¥100,000 handout to those under the age of 18 was not all cash (50/50 cash and coupon) and limited to family with annual income of less than ¥9.6 million.

The Week Ahead

It looks like a quiet week ahead from a macro data perspective, but there are a few highlights. In the United States, focus will be on retail sales and housing starts data. In Europe, we get GDP and inflation data across the euro area. The UK inflation data on Wednesday will garner more attention than usual given the furore over the recent Bank of England meeting.

Monday 15 November

  • Chinese retail sales and industrial production (IP)
  • Eurozone trade balance

Tuesday 16 November

  • Japan trade balance
  • UK claimant count & ILO unemployment rate
  • France CPI
  • Italy CPI EU
  • Netherlands GDP
  • Eurozone GDP
  • US retail sales
  • US manufacturing & IP

Wednesday 17 November

  • UK CPI and Retail Price Index (RPI)
  • Italy trade balance
  • Eurozone CPI

Thursday 18 November

  • Japan CPI
  • US Jobless claims

Friday 19 November

  • Germany PPI
  • Italy industrial 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. One basis point is equal to 0.01%.

3. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Data as of 20 September 2021. 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.

4. Financial Times, “The Fomo rally: ‘fear of missing out’ helps fuel soaring markets,” 12 November 2021.

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