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, equity markets shrugged off concerns over the new Omicron COVID-19 variant and saw a sharp rebound. Tuesday’s strong gains felt more to do with positioning rather than fundamentals, but markets held on to gains and ended the week comfortably in positive territory. The MSCI World Index was up 3.3%, the S&P 500 Index was up 3.8%, the Eurostoxx 600 Index was up 2.8% and the MSCI Asia Pacific Index was up 1.3%.1

Equity Markets See Solid Rebound

Equity markets recovered their poise last week, bouncing back from the US Thanksgiving holiday selloff on news of the new Omicron variant. In Europe, it was the best week in nine weeks as markets reclaimed losses. In the United States, the S&P 500 Index saw it best weekly performance since February and made fresh all-time highs once again.

What were the key drivers for the recovery?

Omicron: Early last week, Dr Fauci, director of the US’s National Institute of Allergy and Infectious Diseases, suggested early signs are showing fewer severe Omicron cases compared to other variants. These comments seemed to provide a catalyst for a turnaround in sentiment that had become extremely cautious. The CNN Fear & Greed Index had fallen into “Extreme Fear” territory, and we have often seen a sharp recovery when investor sentiment reaches such extremes; it is currently in the “Fear” zone.2

Many say it is too soon to fully understand the new variant, but it is seen as far more transmissible than prior variants. For example, the Financial Times highlighted that in South Africa, the seven-day average of new daily cases has increased about 40-fold to 13,000 a day.3 We are seeing new safety measures announced in the United Kingdom, with UK authorities bringing back mask-wearing mandates and urging the public to sign up for vaccine booster jabs.

For now at least, it appears markets have shrugged of the concerns over the heightened transmissibility, with the view vaccine programmes and other preventative measures will hopefully soften the impact. We would caution that as market volumes decline into the holiday season, greater volatility on any significant new Omicron developments is likely.

Tuesday saw an aggressive squeeze higher in the market without much of a catalyst. It felt like the bounce we saw early in the week caused a “pain trade” for those that had cut market exposure in recent weeks and needed to then chase markets higher. It could be that positioning was extremely bearish coming into last week and was overdone and ripe for a rebound.

The move higher was also likely exaggerated as markets passed through key technical levels, that when reached, would trigger further position covering. The European futures traded through both their 100-day moving average and 50-day moving average.

Finally, as we approach year-end, investors may feel pressure to protect performance.

Aside from the above, policy easing headlines from China also helped settle nerves last week. On the commodity front, West Texas Intermediate crude oil and iron ore rallied after China announced a cut in the reserve requirement ratio, and Saudi Arabia raised prices.

Furthermore, in the United States, corporate buybacks ramped up last week, lending support to indices.

Central Bank Meetings in Focus  

Central bank policy takes centre stage as over 20 central banks have interest-rate decisions this week. Focus is primarily on the Federal Reserve (Fed) meeting on Wednesday, and the Bank of England (BoE) and the European Central Bank (ECB) meetings Thursday.

Fed: With US inflation running at levels last seen in 1982, pressure is mounting on the Fed to take action. Inflation is becoming an increasingly political issue, with US President Joe Biden’s administration cautious around the impact inflation is having in terms of approval ratings. In that context, the Fed meeting (Tues/Wed) will be the main talking point mid-week. The market is expecting the Fed will accelerate the pace of asset purchasing tapering, most likely from US$15 billion to US$30 billion a month. This would see the Fed’s quantitative easing programme end in March vs. June on current plan, opening up the path for earlier interest rate hikes.

In response, markets have ratcheted up their expectations of rate hikes from the Fed next year (especially after Friday’s elevated inflation print), and at time of writing, federal funds futures are fully pricing in an initial hike by the June 2022 meeting, with a 79% chance of one by the meeting in May.4 That’s a notable step-up from what was being priced after their last meeting in early November, when an initial hike wasn’t fully priced until September 2022.

BOE: Sterling dipped to a new 2021 low against the US dollar last week as expectations that the central bank will raise interest rates waned because of UK Prime Minister Boris Johnson’s new “Plan B” restrictions to slow the spread of the emergent Omicron variant. Given these concerns, together with some negative brokerage commentary on the UK’s prospects, the probability of an interest-rate increase this week dropped below 20%.

ECB: Less excitement is expected from Thursday’s ECB meeting. Ahead of ECB meeting, on Friday Bloomberg put out its customary (Friday-before) survey of economists. Even more respondents expect the current Pandemic Emergency Purchase Programme (PEPP) to end in March 2022. No change is forecast (still) in median rates through 2023, but the view of some respondents seems to expect a rate hike as soon as September 2022.

Week in Review


European markets bounced back sharply last week, with the major regional indices higher and other indicators demonstrating nerves were calmed—the European market volatility fell sharply and credit spreads tightened, too.

Looking to sector performance, travel & leisure was the strongest sector after being battered in the prior week. It is worth noting the sector is still down 15% over the last month. The autos also saw solid gains. While still positive, real estate, insurers and banks (fading chances of UK December rate hike) were less robust.

Market volumes were poor into the end of last week, with volumes down 15% vs the year-to-date average, but almost 50% below the volumes we saw on the initial variant-driven selloff. This trend is likely to continue into year end, and as mentioned earlier, we could see heightened volatility.

In Germany, Olaf Scholz was officially sworn in as chancellor and the reign of the conservative CDU came to an end. This had no impact on the markets last week, but it will be important to monitor for policy divergence going forward.

United States

A resurgent performance for markets after a tough period around Thanksgiving saw the S&P 500 Index back making fresh all-time highs. Information technology and energy led the charge. All sectors were in the green but consumer discretionary and utilities lagged.

Friday’s consumer price index (CPI) print was the most anticipated macro event of last week ahead of the upcoming Fed meeting. The data was in line with market expectations, with year-over-year CPI at 6.8%, the fastest pace 1982.

The Fed has been in a blackout period ahead of Wednesday’s meeting, so no commentary about the inflation reading from policymakers there.

Asia and Pacific

Asian equity markets enjoyed a small bounce last week. There was very little performance divergence between the key country-specific indices in a region which can be very mixed week-to-week. The spread of the Omicron variant received some investor focus at the start of last week, with certain Asian economies particularly vulnerable to the imposition of strict social restrictions. All sectors in Asia finished higher on the week, with the exception of health care.

The People’s Bank of China (PBOC) announced a rate cut on Monday of 50 basis points,5 unleashing CNY1.2 trillion (US$188 billion) of liquidity. The Chinese central bank also lowered the relending rate for the agriculture sector and small businesses by 0.25%. Premier Li noted that China still has a variety of monetary policy tools at its disposal. Later in the week, the PBOC raised the foreign exchange required reserve ratio for the second time this year, viewed as an attempt to rein in the yuan’s appreciation vs. the US dollar, currently at a 3.5-year high. Yet, some analysts are sceptical the move will trigger a reversal in the yuan’s appreciation given inflows from exports are driving China’s significant trade surplus.

Chinese property developers remain a key focus for markets. The week started with Sunshine 100 defaulting on US$179 million debt payment that was due on Sunday. There were also concerns after Kaisa missed repayment on a US$400 million note which was due on Tuesday. Evergrande also continued to make headlines after it failed to make repayments before the end of a 30-day grace period. Rating agency Fitch cut Evergrande and Kaisa to “restricted default”. Interestingly, the market seemed relatively unfazed by the headlines last week, with real estate stocks outperforming in the region. The market seems hopeful that China will avoid wider contagion as junk bonds held on to recent gains.

The Week Ahead

As discussed, key events this week will be the central bank meetings, including the Fed, ECB, BoE and Bank of Japan. We would also expect the markets still to be at the mercy of COVID-19 headlines. Market volumes will likely continue to drift lower, although Friday’s options expiries offer one last liquidity opportunity.

Tuesday 14 December     

  • UK Claimant Count & ILO Unemployment Rate
  • Eurozone Industrial Production
  • US Core Producer Price Index (PPI)
  • Japan Industrial Production

Wednesday 15 December

  • UK CPI & RPI
  • France CPI
  • Spain CPI
  • Italy CPI
  • US Retail sales & Import prices
  • US Federal Open Market committee meeting
  • China Retail Sales and Industrial Production

Thursday 16 December       

  • France Manufacturing Purchasing Managers Index (PMI)
  • Germany Manufacturing PMI
  • Italy Trade Balance EU
  • UK PMI Manufacturing
  • Eurozone Trade Balance
  • UK Bank of England policy meeting and interest-rate annoucement
  • ECB policy meeting and interest-rate announcement
  • US Jobless claims
  • US Industrial production

Friday 17 December       

  • Germany PPI
  • Eurozone CPI & Construction Output
  • US State employment
  • BOJ policy meeting and interest-rate announcement

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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. 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. Source: Financial Times, “South Africa records fewer severe Covid cases in Omicron wave”, 10 December 2021.

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

5. One basis point is equal to 0.01%.

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