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 saw markets whipsaw from day-to-day as nerves remained brittle over central-bank policy, geopolitics risk and corporate earnings. The key focus for last week was Wednesday’s Federal Reserve (Fed) meeting, which saw Chair Jerome Powell maintain a hawkish stance and leave an interest-rate hike at the March meeting on the table. The MSCI World Index traded down 0.6%, which does not do justice to some of the wild moves we experienced. Elsewhere, the S&P 500 Index ended the week in positive territory, up 0.8%, whilst the STOXX Europe 600 Index was down 1.9% and the MSCI Asia Pacific Index finished the week down 4.7%.1

Fed Sticks with Hawkish Narrative

The much-anticipated Fed meeting last Wednesday saw Powell sticking with the recent hawkish narrative, and as expected, there was not a rate hike, but he noted “the committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so”.2 The question investors are now asking: would that be a 25 basis points (bps) or a 50 bps rate hike?3 At the press conference, Powell did not rule out a 50 bps hike, simply saying “it is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate” and that “we’re going to be led by the incoming data and the evolving outlook”. He added that the Fed will be “nimble” and “humble” when determining the policy path.4

In terms of winding down the asset purchasing quantitative easing (QE) programme, Powell stuck with the end date of March, despite some suggestions he may have ended it with immediate effect last week. In addition, while the Fed released a balance sheet principles statement, it will take at least a couple more meetings to work out the details.

On the back of that, we had a Fed speaker over the weekend, Atlanta Fed Chief Raphael Bostic, commenting in an interview with the Financial Times that “if the data say things have evolved in a way that a 50 bps move is required or [would] be appropriate then I’m going to lean into that… If moving in successive meetings makes sense, I’ll be comfortable with that”.5

In this context, the market may now see five interest hikes in 2022, and many investment bank economists are also moving to that estimate. The next Fed meeting will be on 16 March, so it will be interesting to see whether an interest rate hike is announced.

Market Volatility in Focus

As mentioned in last week’s Notes from the Trading Desk, it was a rollercoaster ride for equity markets, with the US equity market moving in and out of correction territory (down 10%) several times, and last Monday, the STOXX Europe 600 Index saw its worst one day move since 11 June 2020. Coming into 2022, US markets were at all-time highs, so it is important to keep that context in mind, but month-to-date moves make for tough reading, with the S&P 500 Index down 7%, and the Nasdaq down 12%. As we have discussed in recent weeks, the beneficiaries of the extreme levels of central-bank support have suffered since we saw the hawkish narrative take hold at the Fed. The Nasdaq has underperformed, and more notably “unprofitable technology” has slumped significantly.

Ukrainian-Russian Stand Off: How Real Is the Threat?

Nerves have been on edge as Russia President Vladimir Putin continues to amass troops along the Ukrainian border, which has created some market volatility as the threat of war in Europe looms over investors.

The Kremlin has demanded concessions from the North Atlantic Treaty Organization (NATO), including a guarantee the alliance won’t add Ukraine as a member and a rollback of forces from former Soviet states.

Any meaningful aggression could backfire on Putin, the likely results being a stronger alliance between the European Union (EU) and NATO against him (and importantly Germany). US sanctions could be a huge cost to his government and there could be potentially heavy Russian casualties from taking on a much better armed (vs. 2014) Ukrainian army. The knock-on effects for wider Europe would be painful of course, with an inevitable rise in oil and gas prices leading to further inflation risk and supply side damage.

However, the latest news sounds reasonably positive, with Russia indicating that it’s willing to engage with US security proposals. Foreign Minister Sergei Lavrov said the American proposals were better than the ones received from NATO, adding that President Vladimir Putin was studying them and would decide how to respond.

So, despite hostile statements and threats of sanctions, the risk of a major military conflict is still seen by many as relatively low. It is important that the diplomatic track remains open, and Russia’s aggressive stance is seen for what it is—part of its negotiating tactics (nothing new here). Despite opposite views on at least two critical areas (future expansion of NATO and NATO’s troops in Eastern Europe), there are topics that both sides seem to be willing to discuss. With much less support for military operation in Ukraine by the Russian population and heavy economic, human and political losses for Russia, the gains for Moscow seem limited.

The Week in Review


It was another choppy week for global stocks, with market volatility remaining at elevated levels. Volatility in Europe was up further, with the STOXX Europe 600 Index recording a range of 4% through the week. The broad European index closed the week down 1.9%. Investors are still trying to get to grips with hawkish central-bank rhetoric and the prospect of a higher interest-rate environment. With that, it was another big week for value outperformance. Investors are also wary of the rise in geopolitical risk with Russia massing combat forces on the Ukrainian border. It is difficult to predict how long these tensions will last, but discussions are reportedly still ongoing.

The COVID-19 Omicron variant also remains a focus as countries appear to be turning their back on infection data and reopening their economies once again. Several European countries are relaxing restrictions despite high or even rising infection rates, with governments choosing to focus on vaccination rates and hospitalisation data.

In terms of the index-level moves, the UK FTSE 100 Index continues to benefit from its hefty value skew, outperforming other markets last week, albeit finishing the week down 0.4%. The EURO STOXX 50, Europe’s leading 50 blue-chip companies, closed the week down 2.2%, given heavy weightings in technology and the industrials.

The big factor move last week was out of growth and into value, a familiar theme so far in 2022. With that rotation, sector performance divergence was significant. In terms of outperformers, Telecommunications closed the week higher and best on the week after some favourable mergers and acquisitions (M&A) reports and some better-than-expected earnings in the space. Oil and gas stocks fared better last week too, as oil prices rose nearly 3% on the week. Interestingly, European bank stocks rose too despite a flattening in the yield curve; they are still benefitting from the rotation into value. In terms of laggards, with growth stocks under pressure again, it was no surprise to see technology as the main laggard last week. Another interesting move was in the COVID-19 winners/losers, with the Stay-at-Home stocks down 5.4% on the week.

Italian Presidential Selection

Over the weekend, Italian lawmakers voted to re-elect Sergio Mattarella as president, as he put off his planned retirement in order to break the deadlock. With that, Mario Draghi remains as technocrat prime minister and early elections appear to have been avoided. The spread on 10-year Italian debt over similar-maturity German securities should likely shrink.

United States

US equities surprisingly finished higher last week following a late rally last Friday, its biggest intraday rally since June 2020. However, Fed hawkishness continued to drive market bearishness for most of the week. Many market observers adjusted their interest-rate expectations last week, with some feeling Fed Chair Jerome Powell has left the door open for a 50 bps hike in March.

Also, as noted, geopolitical tensions kept a lid on investor sentiment last week. Nonetheless, US earnings fared well towards the end of the week, offering stock markets more support and driving the recovery in the S&P 500 Index to close the week up 0.8%. Meanwhile, the Russell 2000 Index, which is often seen as a bellwether of the US economy, closed the week down another 1% and is down 12.3% on the year so far.

In terms of sectors, energy stocks outperformed in the United States, helped by rising oil prices, to finish the week higher. The sector is a huge outperformer in the United States year-to-date, the only S&P sector to trade in the green for the year and up a whopping 18.4%. The technology sector finished last week higher as well, helped by a late surge on Friday after Apple earnings results beat expectations.

In terms of the laggards, the Industrials sold off last week, with margin concerns continuing to be a clear theme. We do have some large companies reporting corporate earnings this week: Google reports on Tuesday, Meta Platforms on Wednesday and Amazon closes out the majors on Thursday.

In terms of politics, President Joe Biden’s “Build Back Better” programme is expected to be revived soon, albeit as a slimmed-down version. The House Majority Leader, Steny Hoyer, said last week he is confident he can garner support for a smaller bill, supporting Biden’s comments from earlier in the week when he said it may be necessary to break the bill up into smaller pieces to get them passed. It seems like the child tax credit could be a potential flashpoint as it was reported that five Senate Democrats had written a note to Biden urging him to continue to press on with it. This was the particular provision that Democrat Joe Manchin had voiced a number of objections to.


Last week was a poor one for Asian Markets ahead of the Chinese Lunar New Year holidays, with South Korea and Hong Kong closing down 6% and down 5% respectively.

As in other regions, a key theme over last week was the Federal Open Market Committee’s (FOMC’s) announcement on Wednesday. The outlook for rising interest rates will negatively impact the offshore borrowing plans for Asian companies. In addition, lots of attention will be on other central banks this week, with futures pricing in several Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) rate hikes this year.

Looking at the ongoing COVID-19 situation, Hong Kong is facing its biggest outbreak since the beginning of the pandemic, whilst Beijing has tightened restrictions and Japan is to extend quasi-emergency to more prefectures.

Across the region, early fourth-quarter earnings have generally beaten expectations, but have tended to underwhelm, while guidance has also leaned to the negative side.

In Japan, the Nikkei 225 Index closed down 2.9% last week, with the Fed announcement weighing on the market, especially the higher growth tech space. Unsurprisingly, Japanese banks outperformed, with the TOPIX Banks Index up 2.7%.

Looking to macro data, Japan flash manufacturing Purchasing Managers’ Index (PMI) hit a four-year high this month at 54.6, but services activity contracted to 46.6 amid recent COVID-19 resurgence.

On Tuesday, Bank of Japan Governor Kuroda acknowledged the risk of inflation moving higher earlier than expected but reiterated the central bank will maintain ultra-loose policy. Also, Prime Minister Fumio Kishida highlighted importance of firms passing on costs and raising wages.

In China, the market struggled ahead of the Lunar New Year holiday, ending the week down 4.5%.

Fed reverberations compound existing headwinds from property weakness, slowing domestic growth and Beijing’s regulatory crackdown. A host of profit warnings from the beleaguered property companies added to the pain, and Evergrande said creditors have moved to seize land in Hong Kong being used as loan security. There was a report later in the week that said that Beijing is weighing breaking the company up to limit wider fallout. Another name in the sector, Hopson Development, was under pressure after PricewaterhouseCoopers resigned as auditor. The sector continues to face headwinds from slumping property sales and no let-up in Beijing’s regulatory drive.

Note that China is now closed for Lunar New Year and will reopen next Monday.

The Week Ahead

A quiet start to the week in Asia with some many holidays this week for Chinese Lunar New Year. In the United States, any Fed speak and earnings from technology heavy weights will be a focus. At the end of the week, we have the monthly US nonfarm payroll data for January. In Europem inflation and gross domestic product (GDP) data will be in focus ahead of the European Central Bank (ECB) and Bank of England (BoE) meetings this Thursday.

Monday 31 January

  • Spain Harmonised Index of Consumer Prices (HICP) inflation
  • Euro area fourth quarter gross domestic product (GDP)
  • Italy fourth quarter GDP
  • Germany Harmonised Index of Consumer Prices (HICP) inflation

Tuesday 1 February

  • UK nationwide house price survey
  • France HICP inflation
  • US Institute for Supply Management (ISM) manufacturing

Wednesday 2 February

  • Euro area flash CPI inflation
  • Italy HICP inflation
  • US ADP employment change, MBA mortgage applications

Thursday 3 February

  • BoE interest-rate decision
  • ECB interest-rate decision
  • US initial jobless claims, factory orders

Friday 4 February

  • France industrial production
  • US January employment report

Views You Can Use

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Quick Thoughts: The Inflation Debate

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PODCAST: Anatomy of a Recession: Changing Conditions but US Economy Remains Strong

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Is Now the Time to Consider Chinese Equities?

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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. Source: Reuters,” Fed likely to hike rates in March as Powell vows sustained inflation fight”, 27 January 2022.

3. One basis point is equal to 0.01%.

4. Source: Reuters,” Fed likely to hike rates in March as Powell vows sustained inflation fight”, 27 January 2022.

5. Source: Financial Times, “Fed could use half-point rate rises if needed, says official”, 9 January 2022.

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