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 lacklustre performance for many equity markets as focus turned to hawkish rhetoric from the Federal Reserve (Fed), COVID-19 concerns in China and uncertainty around the outcome of the French presidential election. In addition, the war in Ukraine continues to grind on with little or no sign of progress in peace talks. Last week, the MSCI World Index declined 1.5%, the S&P 500 fell 1.3%, the STOXX Europe 600 Index rose 0.6% and the MSCI Asia Pacific Index fell 2.1%.1

French Election

Up until last week, the French presidential election campaign had not really ruffled the market’s feathers, as the polls had shown a comfortable lead for President Emmanuel Macron.

However, this changed last week as the polls saw a late surge for right-wing candidate Marine Le Pen and a slump in support for Macron ahead of yesterday’s first-round vote. French equities had declined on this shift, with the French banks particularly weak. Le Pen has benefitted from campaigning on economic challenges such as the rising cost of living and energy inflation, and moving away from her traditional approach of focusing on immigration and other social issues.

The market’s nerves are due to the uncertainty a Marine Le Pen presidency would cause. Whilst she has backed away from policies such as France ditching the euro, or leaving the European Union (EU), she would likely be more confrontational with EU partners. In addition, her policies of rolling back pension reforms and increasing protectionism are not deemed “market-friendly”. Finally, her previous pro-Putin stance could disrupt the West’s united response to Russia’s aggression in Ukraine.

However, Macron did in fact win the first round (with 27.8% of the vote) while Marine Le Pen coming second (with 23.1%) and Jean-Luc Mélenchon third (at 21.9%). The two candidates will proceed to a second-round head-to-head on 24 April.

We are essentially seeing a rerun of the 2017 election result, which saw Macron win with 66% of the vote. Polls are far closer this time round though, with some even putting it as close at 51%/49% (Macron/Le Pen). Macron’s support in the first round held up better than some predictions, giving a small boost to France’s stock market. Furthermore, the left-wing candidate, Lean-Luc Mélenchon told his supporters “You must not give a single vote to Marine Le Pen”, although notably, he stopped short of backing Macron.

Looking ahead, the televised debate on 20 April will be key ahead of the vote on the 24 April. Expect a volatile few weeks for French markets, with French banks a good barometer for sentiment. It is also worth noting the yield on the French 10-year government bond has widened to 1.286%, trading at levels not seen for over five years. We would caveat that with the broader context of central banks moving away from easing and the inflationary impact, but the election will also likely be a market influence in France.

US Fedspeak Remains Firmly Hawkish

Last week, Fed speakers stuck firmly with the hawkish narrative. Fed Governor Lael Brainard set the tone on Tuesday of last week, when he stated that curbing inflation is “paramount” so the Fed could start reducing its balance sheet as soon as May and would be doing so at “a rapid pace”. She also indicated that interest-rate hikes could come at a more aggressive pace than the typical increments of 0.25 percentage points. This garnered a lot of attention, as she is traditionally seen as a dove.

The Federal Open Market Committee minutes from the last meeting were released on Wednesday, which also had a hawkish tone. The minutes stated the Fed will look to reduce its bond holdings by as much as US$95 billion a month (US$60 billion in US Treasuries and US$35 billion in mortgage-backed securities) which was in line with market expectations, though nearly double the peak rate of US$50 billion a month the last time the Fed trimmed its balance sheet from 2017 to 2019. Somewhat unsurprisingly, the minutes noted many would have raised 50 basis points (bps) in March, but held off because of the Ukraine war. However, going forward, members viewed one or more 50 bps increases as possibly appropriate if price pressures fail to moderate.

Sentiment was not helped when a former Fed official, Bill Dudley, wrote an article stating “Investors should pay closer attention to what [Fed Chair] Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own, the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated”.2

In this context, we saw a significant jump in Treasury yields, with the US 10-year note up 32 bps to 2.7%, and US real rates (inflation-adjusted interest rates) also jumping last week, up 25.1 bps to -0.18%.3 As these real rates move higher, some argue the TINA (There Is No Alternative) to equities argument is eroding.

The Week in Review


Markets did feel quieter as we approach the Easter holiday, but there were still some meaningful moves in European equities, with huge divergence between best/worst sectors. The STOXX Europe 600 index was essentially flat last week, but health care stocks surged as fears over aggressive central bank tightening (Brainard’s comments were a clear catalyst), recessionary fears in Europe and a stronger dollar saw a glut of buying in pharmaceutical stocks. In addition, nerves over the outcome of the French election added to the “risk-off” sentiment. In contrast, the “risk-on” sectors struggled last week, with technology, automotive, banks and travel stocks all weakening.

Looking at country indices, the Swiss Market Index unsurprisingly outperformed, up 2.2%, thanks to its pharmaceutical heavyweights. France’s CAC 40 Index had a miserable week, down 2.7%, as Le Pen saw a late surge in the presidential election polls, as noted.

It was quite a light data week, but inflationary pressures were evident in the February eurozone Producer Price Index (PPI), which rose 31.4% year-over-year (Y/Y).

Taking a quick look at European credit markets, the ITRAXX XOVER CDS Index widened, up 9% last week.

United States

As discussed, Fedspeak was the main talking point in the United States, and the hawkish narrative weighed on growth/tech stocks, with the Nasdaq 100 Index down 3.6% last week, lagging the S&P 500. This was reflected in sector performance, as the tech space lagged, whilst (as in Europe) the defensives saw significant outperformance, with health care stocks rising.

The S&P 500 Index is testing a key technical support level at its 200-day moving average—something to keep an eye in coming sessions.

Looking to the CNN Fear & Greed Index, it suggests investor sentiment is in “no-mans land”, with a neutral sentiment rating.4 This week, second-quarter earnings season kicks off in the United States, with JP Morgan reporting on Wednesday. Earnings season could give investor sentiment more direction in coming weeks.


Last week was poor in general for stocks across Asia, as the MSCI Asia Pacific closed down 2.1%. Japan was once again the underperformer, with its benchmark index down 2.4%. The main themes were COVID-19 restrictions, increased Russia sanctions, crude oil volatility, a weaker yen, weaker bonds, and concerns over a hawkish Fed continue.

Mainland Chinese equities closed the week mildly lower, having been closed Monday and Tuesday for the Ching Ming Festival. Interestingly, spending during this holiday plunged 30.9% from a year ago to CNY18.8 billion, about 39.2% of the level seen in 2019.5 The number of people who undertook trips fell 26.2% to 75 million from last year, or 68% of the level in 2019.

China’s COVID-19 outbreak continues to grow, with all of Shanghai now in some form of lockdown. This, together with continued concerns about a hawkish Fed, curbed risk appetite in general. On a more positive note, regulators altered a rule that will provide US regulators fuller access to auditing reports, reducing risk of Chinese stocks being delisted from the United States, which had been blamed for recent volatility.

Last week, China’s March Purchasing Management Index (PMI) reading was weaker than expected, with the Composite PMI at 43.9 (the prior reading was 50.1) and the Services PMI at 42 (the prior reading was 50.2). Additionally, the Caixin services purchasing managers’ index came in at 42.0 vs. 50.2 prior. A steep decline in new work drove the decline (contracting at the sharpest pace in two years), with widespread movement restrictions across China, while business confidence was hit by the war in Ukraine, Caixin said in its report. We saw some downgrading of China growth forecasts amid the headwinds from its COVID-19 outbreak, weak property market and commodity-driven cost pressures, reinforcing expectations the government could undershoot its 2022 gross domestic product (GDP) growth target.

In response, the State Council signalled looser monetary policy and measures to boost consumption; the People’s Bank of China stated that will also establish financial stability protection fund to bolster ability to prevent systemic risks.

Hong Kong’s equity market was closed on Tuesday for the Ching Ming Festival. Early in the week, Chief Executive of Hong Kong, Carrie Lam, said she won’t seek second term. The tech space traded higher early last week as delisting concerns eased, only to give the gains back as COVID-19 headlines worsened on Wednesday (partial or full lockdown in 23 Chinese cities, which account for 13.6% of the country’s population and 22% of China’s GDP).

In Japan, we saw continuing focus on higher bond yields and weaker yen. The yield on the 10-year JGB rose to 0.23% from 0.21% at the end of the previous week. The yen depreciated to around 124.05 vs. the US dollar, its weakest level in nearly seven years. A further easing of border restrictions failed to offset the adverse impact on sentiment of a hawkish Fed and the negative repercussions, particularly inflationary pressures, of the Russia-Ukraine war.

On the recent yen weakness, Bank of Japan Governor Haruhiko Kuroda said that recent moves had been “somewhat rapid”, emphasising the importance of currency rates moving stably, reflecting economic and financial fundamentals.

Elsewhere, in Australia, the Reserve Bank of Australia announced that it has abandoned its language of patience and signaled that it could begin raising interest rates within months if wages and inflation data produce strong results.

Also, South Korea’s 2022 inflation is likely to be “much higher” than the central bank’s February forecast of 3.1%, according to a Bank of Korea statement. Inflation is likely to remain in the 4% level for some time due to rising oil and grain prices in the wake of the Ukraine war.6

The Week Ahead

Although we have several market holidays over the Easter weekend, there is still plenty to focus on in terms of geopolitics and macroeconomic data. Fallout from the French election will be closely watched, and the Ukraine crisis remains front and centre. In terms of macro data, we have inflation readings in the United States and Europe which will be important, given current inflationary pressures. Elsewhere, US earnings season kicks off this week.

Monday 11 April

  • UK Manufacturing & Industrial Production & Trade Balance
  • Norway CPI
  • Sweden PES weekly unemployment data

Tuesday 12 April

  • UK ILO Unemployment Rate & Claimant Count
  • Germany CPI
  • France Trade Balance
  • US CPI
  • US Federal budget

Wednesday 13 April

  • UK CPI & RPI
  • Spain CPI
  • Italy Industrial Production
  • Eurozone Industrial Production
  • US Core PPI

Thursday 14 April

  • European Central Bank Interest-Rate Decision
  • Sweden CPI
  • US Jobless claims

Friday 15 April

  • France CPI
  • Italy CPI EU Harmonized
  • US Manufacturing & Industrial production

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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,  “If Stocks Don’t Fall, the Fed Needs to Force Them”, 4 April 2022.

3. Source: Bloomberg.

4. 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.

5. Sources: BBC News; China’s Ministry of Culture and Tourism, “China lockdowns: Tourism spending plunges over key holiday”, 6 April 2022.

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

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