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 closed roughly flat overall last week; however, there were some notable moves beneath the surface. The MSCI World closed the week down 0.12%, the S&P 500 Index was up 0.3%, the European Stoxx 600 Index was down 0.1%, whilst the MSCI Asia Pacific underperformed again, down 0.4%.1 The key theme for markets last week was the resurgence of COVID-19 in Europe and the threat to economies potential new lockdowns pose. This drove the risk-off theme through the week, as defensive plays were sought. Outside of the COVID headlines, the European Central Bank (ECB) remains dovish, with President Christine Lagarde reiterating that the conditions to be met for raising interest rates are unlikely to be met in 2022. In terms of data, the latest US and UK macroeconomic reports were strong. Meanwhile, inflation remains a hot topic for markets, as corporates continue to pass cost pressures onto consumers.

Lockdowns Reintroduced in Europe

Unfortunately, there is only one place to start when we consider market-moving themes last week. The threat of more lockdowns in Europe wasn’t particularly new, but it was the uncertainty around how far and wide restrictions would go that shook investor confidence. Also, markets were primed for a pullback, European equities became technically overbought midweek. The breadth of market rallies also turned negative last week, with more decliners than advancers, despite a small rally in markets through the start of the week. That lack of breadth behind a market rally is typically a signal that a bull run is growing tired.

Early on Friday, Austria announced a nationwide lockdown for a maximum of 20 days starting Monday. The restrictions are likely to be extended beyond the 20 days for the unvaccinated. Additionally, the Austrian government will impose compulsory vaccination from 1 February as the country scrambles to make up for lost ground on the vaccination front. With these announcements, investors began to look towards the larger neighbouring economies for an indication on whether lockdowns were likely to become more widespread.

In Germany, Health Minister Jens Spahn had said earlier last week that a lockdown cannot be ruled out there and advised that the country has not reached peak of its fourth COVID wave. However, on Friday afternoon last week, German Foreign Minister Heiko Maas reportedly ruled out a full nationwide lockdown. Nonetheless, the stage appears to be set for increased restrictions. Chancellor Angela Merkel was reported to have said earlier today that the current COVID situation in Germany is worse than anything it has seen before and that tighter restrictions are needed.

Note, Germany contributes 29.6% towards eurozone gross domestic product (GDP); hence, Germany is a clear focus for economists and investors.

Elsewhere, Belgium re-imposed a work-from-home requirement, whilst Spain brought back restrictions on large gatherings. The Netherlands, Sweden, Greece, the Czech Republic, Slovakia, Hungary and Poland all imposed stronger measures last week. There was significant civil unrest in a number of these countries, as demonstrators took to the streets in protest against the new restrictions.

We saw a clear shift in sentiment on lockdowns last week, as countries across Europe continue to hit new daily case records and death rates increase again. But it’s not just in Europe that we are seeing notable increases. COVID-19 cases in the United States hit just under 97,000 late last week, up nearly 30% from the start of November and the highest level since early October. Focus shifts back to vaccination rates as countries work to pick up the pace once again.

Some countries in continental Europe seem to be learning the merits of keeping vaccinations at the forefront. For example, Germany and Austria managed the pandemic’s initial surge relatively well, but by early October of this year, vaccination rates were far behind the eurozone average and we’ve seen a resurgence in cases.

What did this mean for markets last week? Overall, the Goldman Sachs basket of reopening stocks closed the week down 4.5%, whilst the Stay-at Home basket closed up 2.2%.2 With that, travel and leisure stocks were the clear laggard last week as the lockdowns threaten international travel this winter. Bank stocks struggled last week as well for a few reasons: lockdown caution; 10-year Bund yield fell below both 100- and 200-daily moving averages on Friday as investors flocked to safety; and, as mentioned, Lagarde pushed back against tightening once again.

Meanwhile, real estate stocks were higher as yields came under pressure on Friday. Given the growth bid last week, technology stocks were also higher. In summary, the risk-off theme was clear as investors moved out of COVID-19 reopening plays.

Week in Review


European equities closed the week lower after giving up all their weekly gains on Friday amid headlines around the re-introduction of lockdowns in central Europe. Up until Friday, the weekly market move had been fairly insignificant, trading in its tightest weekly range in two months. Volumes at the start of the week were poor too, the lowest since the start of September. Volatility spiked on Friday, up 25% on the week at one point. Nonetheless, the pullback on Thursday and Friday snapped the recent steady grind higher for European equities. On Wednesday, European stocks closed up for the 13th time in 14 sessions, an occurrence which has only happened once before in 1999. Capital raises continue in Europe.

The country-specific indexes reflected sector moves more than anything. The Spanish IBEX lagged, down 3.6% last week given its significant exposure to travel and leisure stocks as well as banks. The UK FTSE Index was down 1.7% on the week for similar reasons. The German DAX Index outperformed despite worsening COVID headlines, up 0.4%, helped by its exposure to technology and food delivery stocks. Growth stocks fared better on the week, whilst value stocks in Europe finished the week down. Sector dispersion increased last week, with the latest COVID figures providing the catalyst.

United Kingdom: Out of favour with investors? Last week saw strong UK macro data that will add to the pressure on the Bank of England (BoE) to raise interest rates. October UK inflation data surprised to the upside, as the Consumer Price Index (CPI) grew 4.2% year-over-year (Y/Y) and RPI grew 6% Y/Y. In addition, Friday saw the release of stronger-than-expected UK retail sales and, more importantly, solid employment data (unemployment rate at 4.3% for the July-September period).

The BoE held off lifting rates in order to see the impact of the end of the furlough scheme (ended in September), so that stronger employment data should be reassuring. However, the market is wary of being wrong-footed by the BoE again and sees only a 52% chance of a rate hike in December (82% chance of a hike for the following Feb meeting).3 There are still a few key data points before the BoE policy meeting on 16 December, which promises to be an interesting one.

Thinking about UK assets more broadly, generally there does seem to be an overhang due to UK supply chain bottlenecks/the ongoing spat with the European Union (EU) over Article 16 and the loss of confidence in the BoE. Last week’s Bank of America “Flow Show” report and Fund Manager Survey showed the UK suffering outflows, and it is the region fund managers are most bearish on. Again, EU equities are favoured, with respondents most bullish on that region.

However, to balance out some negativity, other market participants have noted the discount UK equities hold to other regions, which could be pointing to a potential rally.

United States

Last week saw US equities grind higher, with the S&P 500 Index closing up 0.3%, close to fresh all-time highs. Looking beyond the headline move, there was a clear outperformance of growth names over value, with the tech-heavy Nasdaq 100 Index outperforming, up 2.3%, vs. the more value-biased small capitalisation Russell 2000 Index, which declined 2.8%. This divergence is also reflected in sector performance, with consumer discretionary and technology stocks outperforming. In contrast, the value sectors of energy and financials were the laggards.

Next Federal Reserve Chair Nomination: In terms of talking points, a key focus as we start this week is President Joe Biden’s reappointment of Jerome Powell as Fed chair. Lael Brainard (seen as more dovish) was named vice chair. Some progressives have criticised Powell, but markets seem to be embracing the status quo.

Over the weekend, the US House of Representatives passed President Biden’s US$1.7 5trillion “Build Back Better” social spending bill. The harder task of getting the bill through the Senate (50/50 split between Republicans and Democrats) lies ahead, as it would take just one Democrat to oppose the bill to block its passage. Democrats are targeting a Senate vote by Christmas.

Looking to Fedspeak, Fed Vice Chair Richard Clarida said that the Federal Open Market Committee could take action earlier than expected to tackle inflation. Given inflationary pressures, Clarida said “it may well be appropriate (at the December meeting) to have a discussion about increasing the pace at which we’re reducing our balance sheet.” Any acceleration of the Fed’s taper on its asset-purchasing program would most likely see a knee-jerk negative reaction from markets, with heightened volatility.

While investors seem to be favouring US stocks of late, the CNN Fear & Greed investor sentiment index has been looking stretched, and we have now seen this fall in recent sessions. It fell from “Extreme Greed” territory last week, suggesting waning underlying conviction, despite the S&P 500 Index grinding higher last week.4

Looking to US macro data last week, October retail sales were stronger than expected at +1.7% month-over-month, and the US Empire Manufacturing index came in much strong than expected at 30.9 as order growth and employment accelerated, while an index of selling prices increased to its highest level dating back to 2001.

Asia and Pacific

Asian equities were mixed week last week, with concerns about COVID curbs in Europe and Fed tapering having a negative impact, as well as headlines out from central banks and the semiconductor space.

Chinese markets ended mixed last week as the CSI 300 Index closed flat and the Shanghai Composite edged up 0.6%. Disappointing earnings from Alibaba (amongst others e.g., Baidu) topped off a week that saw more negative headlines on the economy amid a scramble from real estate firms to raise funds (as previously flagged). The People’s Bank of China (PBOC) continued to signal its support for the economy as it unveiled its latest targeted lending program, this time aimed at the domestic coal sector. Analysts have estimated that the central bank’s various programmes are slowly adding up to 1-2% of China’s GDP.

As we started this week, the PBOC left Loan Prime Rates (LPRs) unchanged as expected. The media so far have focused on language tweaks signalling a looser bias. The central bank said it would keep its prudent monetary policy “flexible and targeted” and strike a balance between economic growth and risk controls. It added that it would keep liquidity reasonably ample while it also saw risks in the property market generally under control.

Hong Kong’s Hang Seng Index closed last week down 1.1%, mainly due again to Alibaba and some of the other tech giants who come out with disappointing earnings numbers, as well as concerns around China’s continued regulatory (tech) crack down.

South Korea’s equity market closed the week pretty much flat, with the semiconductor space in focus once again. We saw strong November chip export data.

Japan’s equity market was muted over a week that saw the government announce a larger-than-expected stimulus package, with the Nikkei 225 Index closing up 0.5%. The Bank of Japan reaffirmed its dovish stance, which led the yen to weaken against the US dollar.

Meanwhile, India’s stock benchmark closed below its 50-day average on Friday for the first time in six months as profit taking hit the metals, banks and PSU sectors. Indian Prime Minister Narendra Modi announced that the government would be repealing his controversial farming laws (a major climbdown for the Modi administration).

Note, Japan will be closed Tuesday of this week and the US market will be closed Thursday.

Week Ahead


Tuesday 23 November: Japan

Thursday 25 November: US (Thanksgiving)

Friday 26 November: US (half day)

Monday 22 November      

  • Spain Trade Balance
  • Eurozone Consumer Confidence
  • US Existing Home Sales

Tuesday 23 November:      

  • One of the most dovish MPC members on the BoE, Jonathan Haskel, speaks on “high inflation now and then”.
  • France Composite/Manufacturing/Services Purchasing Managers Index (PMI)
  • Germany Composite/Manufacturing/Services PMI
  • Eurozone Composite/Manufacturing/Services PMI
  • UK Composite/Manufacturing/Services Manufacturing PMI
  • US Manufacturing PMI

Wednesday 24 November

  • BoE’s Silvana Tenreyro is due to speak at the Oxford Economics Society.
  • France Business Confidence
  • Germany IFO Business Climate
  • US GDP
  • US New home sales
  • US FOMC minutes
  • Japan Manufacturing PMI

Thursday 25 November    

  • Riksbank Interest-Rate Decision
  • ECB Monetary Policy Accounts
  • Germany GDP
  • US Thanksgiving
  • US Jobless claims

Friday 26 November         

  • Italy Consumer Confidence Index


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1.Indices are unmanaged and one cannot invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

2.Indices are unmanaged and one cannot invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

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

4. 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.


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