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 equity markets lurch from one headline to the next, as investors tried to understand the fallout from the bleak news from Ukraine. Markets plunged on Thursday morning in the wake of Russia’s invasion, only to bounce back towards the end of the week. The situation for markets remains incredibly fluid with sentiment brittle. On the week, the MSCI World Index was down 0.1%, the S&P 500 Index up 0.8%, the STOXX Europe 600 down 1.6% and the MSCI Asia Pacific Index down 3.8%.1

Market Turmoil Following Russian’s Invasion of Ukraine

Thursday saw equity markets gap lower, suggesting Russia’s full-scale invasion of Ukraine on Thursday was not priced into markets, although a late rally in the United States saw markets recover losses. Whilst it was well known that Russian troops were massed on the Ukrainian border, it seems most did not expect Russian President Vladimir Putin to launch such an assault. On the day, European equities slumped 3.3% and the Russian market saw its largest decline on record, a fall of 33%. This is the fifth-worst stock market performance globally on record (BBG).2

In contrast, the US market rallied in the last hours of the session, to end the day up 1.5%. Notably, the Nasdaq had its largest intraday swing since 1971, also closing higher.3

Energy prices saw sharp gains, with brent crude oil up 4.7% to US$97.93 (hitting U$105.79 last week), West Texas Intermediate (WTI) crude oil up 1.5% to US$91.59, and the Dutch Gas 1m forward up 23.3% (it was up as much as 59%).

Friday saw European equities recover ground, catching up with the rally in the United States. Reasons cited for the bounce were an easing of commodity prices from the highs, some reassuring words from the European Central Bank (ECB) and the sanctions announced by the West which did not initially include SWIFT. With that, the moves for European equities on the week were not as extreme as one would have expected, and US equities even ended the week in positive territory. Russian equities bounced 20% on Friday.

Despite the positive end to the week for markets, developments over the weekend have progressed quickly and the West announced stricter, more far-reaching sanctions on Russia and Russian assets. Notably, a “select” number of Russian banks will be removed from the SWIFT international payments system to “ensure that these banks are disconnected from the international financial system and harm their ability to operate globally”. Details are still to be confirmed. In addition, it is clear there is a broader move to reduce exposure to Russian assets, with BP announcing plans to exit the Rosneft partnership and the Norges Sovereign wealth fund stating it will divest its Russian assets following Russia’s invasion of Ukraine.

In that context, markets are weaker today, with European equities weakening and the Russian local market (MOEX) suspended. The FX market is open, and the ruble is down sharply, hitting a record low against the US dollar. The Russian central bank has also announced an interest-rate hike from 9.5% to 20%. Unsurprisingly, European defence names such as BAE Systems are soaring as European countries vow to ramp up spending.

With so much noise out there, we think it is important to try and take a step back and assess the economic implications of this crisis.

The inflationary pressures are clear, with commodity prices soaring. Russian gas exports are important to Europe. It is well known that the pain from the gas price moves (+50% on Thursday) is significant, particularly for Germany and Italy.  The Italian government has said it is reviewing options, including reopening shuttered coal plants. In Germany, the government is reported to be considering delaying the phasing out of nuclear power, which is quite remarkable, given the Green party is in the government coalition.

On the agricultural side, it’s worth remembering that Russia and Ukraine account for approximately 29% of global wheat exports and about 18% of all corn exports. Fighting has been seen in the Ukrainian ports on the Black Sea coast, which are crucial chokepoints for the country’s grain exports. Wheat and corn prices rose to multi-year highs. Furthermore, fertilizer prices have also rallied, as Russia was the world’s largest exporter of nitrogen products as recently as last year.

In light of recent events, some economists are raising their inflation forecasts.

Credit markets are also a key consideration as uncertainty sees the cost of financing rise. European credit spreads widened on Thursday of last week, and highly levered companies will likely be in focus. ECB President Christine Lagarde said the central bank will do what is needed to ensure price and financial stability, and reiterated that liquidity will be available. In addition, with more extreme sanctions on Russian finances, central banks will be alert to financial systemic contagion.

Central bank reaction will be key for investor sentiment. There are already signs the ECB will slow the pace of any tightening, with ECB member Robert Holzmann saying that the Ukraine conflict may delay the end of the ECB’s stimulus effort (March), in a sign that policy could take an unexpected dovish turn. With that, markets see a reduced chance of an ECB rate hike by year end.

The Week in Review

United States

US equities showed some relative resilience last week to close higher overall on a holiday-shortened week. The focus was firmly on events in Ukraine and subsequent economic sanctions Russia faced from the United States and others. Whilst Russia’s military advance in Ukraine drove broad risk-off moves, US stocks seemed to benefit from their geographical distance from the conflict as stock markets experienced a firm bounce on Friday.

With regards to the Fed’s reaction, the probability of a 50 basis point (bps) hike in March appears to have fallen, given the more moderate recent commentary from a range of Fed speakers. However, the expected number of hikes for 2022 appears unchanged, as higher commodity prices continue to drive inflation concerns. Also, Fed Governor Waller said last week that he still supports a 50 bps hike in March and 100 bps worth of hikes in the first half of 2022 if inflation data warranted it. That now means there are three voters (Waller, Bullard and Bowman) who are now publicly open to a 50 bps hike in March. With many continuously moving parts, this does set the Federal Open Market Committee up for an interesting debate.

There was a clear defensive skew to US stock market performance last week. Health care, real estate investment trusts (REITs), utilities and communication services stocks closed higher, while consumer discretionary, consumer staples and financials finished lower on the week. Energy stocks were higher helped by the move in WTI prices. The sector is now up more than 20% year to date in the United States. . Despite the focus being on macro-driven events last week, it remains busy on the earnings front too. With the majority of S&P 500 companies having reported, earnings are surpassing estimates, and fourth-quarter estimates have also risen.


Asian equities closed last week broadly lower following the rise in geopolitical tensions. The MSCI Asia Pacific closed the week down as investors debated whether Russia’s invasion of Ukraine would be an isolated event or would have broader, global read-through. The Hang Seng was the notable laggard in the region, but Taiwanese stocks were also weaker with reports Taiwan had detected nine Chinese military aircraft in its southwestern air defence identification zone. Chinese equities were helped by reports that the central bank’s monetary policy adjustments in March are likely to be looser than expected. The China Securities Journal reported that the central bank may further lower the benchmark Loan Prime Rate in March if credit expansion falls short of expectations.

Week Ahead

Clearly, all the focus is on the situation surrounding Russia/Ukraine. The first talks between Russia and Ukraine today will be a focus. In addition, details of the sanctions against the Russian financial system will be key. Aside from that, US President Joe Biden’s State of the Union address will be closely watched, as will Fed Chair Jerome Powell’s senate banking committee appearance.

In terms of macro data, of note we get Purchasing Management Index data (PMIs), eurozone Inflation data and the US February employment report.

Monday 28 February

  • Spain Consumer Price Index (CPI)

Tuesday 1 March

  • Italy HICP Inflation & New Car Registrations
  • Germany HICP Inflation
  • US Construction spending & Manufacturing ISM

Wednesday 2 March

  • Germany Unemployment Change
  • Eurozone CPI Estimate
  • US Beige Book

Thursday 3 March

  • Eurozone Producer Price Index
  • US Factory orders & Nonmanufacturing ISM

Friday 4 March

  • Germany Trade & CA Balance
  • Italy gross domestic product
  • Eurozone Retail Sales
  • US February Nonfarm Payrolls & Unemployment Rate

Views You Can Use

Asset Class Implications of Russia-Ukraine Conflict 

Russia has invaded Ukraine. Our Franklin Templeton Investment Solutions team reflects on the human tragedy that is occurring as they also parse the data to understand the resulting economic and market implications. If the conflict remains protracted, it may produce a “low growth, high inflation” environment, in which case nimble management and keen attention to policy responses will be required. Read more. 

Thoughts on Russia-Ukraine

The degree of the impact of recent Russia-Ukraine strife largely depends on the Western response, which in turn depends on the severity and duration of the conflict itself, according to Templeton Global Equity Group. The team shares its latest views on the situation. Read more. 

Ukraine-Russia Tensions Signify Multi-Polar World

Ukraine-Russia tensions are making headlines—here’s a quick take from Brandywine Global’s Francis Scotland on how he views the situation from an investment-management lens. Read more. 

MENA Equities: Five Key Themes and Reasons for Optimism

The global economy is currently facing headwinds because of the Russian-Ukrainian conflict, but there are several reasons to be optimistic about the outlook for equities in the Middle East and North Africa (MENA) region, according to Franklin Templeton Emerging Markets Equity’s Bassel Khatoun and Salah Shamma. They point to several themes supporting the investment case, including robust government balance sheets, currency pegs to the US dollar and higher oil prices, which should provide policymakers with ample tools to mitigate any inflationary risks over the medium term. Read more. 

Russia: Investment Implications of Ukrainian Invasion 

Investors’ worst fears about Russia’s intentions toward Ukraine have materialized following Russian President Vladimir Putin‘s announcement he is sending troops into the country to “demilitarize” the nation. Our Emerging Markets Equity team provides insights on the situation. Read more. 

Opportunity in Muni Market Volatility 

January was a volatile month for the markets in general, and municipal bonds were not immune. Ben Barber, Director, Municipal Bonds, Franklin Templeton Fixed Income, opines on how the prospect of rising interest rates is impacting the market, and how volatility can create opportunity. 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. Source: Bloomberg. Excludes Venezuela.
3. Fortune, “This Week Had One of the Incredible Vaults in the History of Equity Markets,” 24 February 2022.

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