Equity markets traded lower last week as hawkish comments from central bankers both in the United States and Europe weighed on sentiment. In addition, further COVID-19 lockdown restrictions in China and the bleak picture in Ukraine gave investors further reason to step back from markets. In that context, the MSCI World Index was down 2.6% last week, the STOXX Europe 600 Index was down 1.4%, the S&P 500 Index was down 2.8% and the MSCI Asia Pacific Index was also down 2.6%.1
Victory for Macron in French Elections
On Sunday, the French election went as polls predicted, with current President Emmanuel Macron winning 58% of the vote, beating opponent Marine Le Pen’s 42%. Polls had widened in favour of Macron in the past week, and as a result, the CAC40 Index rose last week. Macron is the first French president to be re-elected since Jacques Chirac in 2002. That said, France remains a divided country, with 72% turnout the lowest since 1969 and three million voters casting spoilt or blank ballots. Macron said his government would have to “answer their choice to refuse to choose”.
Victory for President Macron is certainly the more market-friendly outcome, given his economic reform agenda and support for the European Union (EU) cohesion.
Given investors had anticipated the election outcome and it was largely priced into the market, the CAC40 Index traded lower after the results came in.
Attention will now turn to parliamentary elections in June where Macron will aim to hold on to his majority.
Hawkish Central Bank Rhetoric
Last week saw several central bankers across the globe coming out with hawkish commentary, outlining the path ahead.
In the United States, Federal Reserve (Fed) Chair Jerome Powell said that a 50 basis-point (bp) hike is on the table for the May meeting, arguing that it’s appropriate to be moving a little more quickly with front-end loaded policy. The Fed’s Mary Daly said the Federal Open Market Committee (FOMC) still needs to deliberate whether rate hikes should be 25 bps, 50 bps, or 75 bps.
St. Louis’ Fed President James Bullard said inflation expectations threatening to become unmoored, although he also said Fed isn’t as far behind the curve as some think. In addition, Bullard talked up potential for a 75 bp hike and reiterating that he favours a 3.5% base rate (much higher than the suggested neutral rate). Fed funds futures are now pricing in 9.75x 25 bp hike by the end of the year (up from 8.59x at the end of last week), and there seems to be a growing consensus that quantitative tightening (QT) will be announced in May and begin in June.
Interestingly, we had some European Central Bank (ECB) members breaking rank to strike a more hawkish tone. Vice President Luis De Guindos suggested that quantitative easing (QE) can end in July, and that rate hikes could commence later in the month. Latvia’s governor Martins Kazaks said that a rate increase was possible as soon as July, although he is a recognised hawk. Bundesbank President Joachim Nagel said that the ECB may raise rates early in the third quarter if it decides to end bond purchases at the end of June. Money markets have now priced in 24 bps worth of ECB hikes at the July meeting, up from 11 bps last week.
On the back of these comments, we saw bond yields continue to push higher this week, with the US 10-year yield up 7.2 bps, the German 10-year yield up 13 bps, the French 10-year yield up 8.9 bps, and the UK 10-year yield up 7.3 bps.
The Week in Review
European equities sold off last Friday to close the week down 1.4% overall. Stock markets faced a number of headwinds, including increased central bank hawkishness, an uncertain corporate earnings season, and the ongoing destruction of Ukrainian towns and cities by Russian forces. Hawkish statements from FOMC members largely drove the late selloff last week.
The CAC40 Index (down 0.1%), was the best-performing European market last week as polls moved in Macron’s favour ahead of the weekend vote.
It is early days in the latest European earnings season, with 10% of the STOXX Europe 600 Index having reported (46 out of 442 which are due to report). Reports have surprised to the upside so far, with more companies beating than missing expectations across all four measures: sales surprise, sales growth, earnings surprise and earnings growth. In terms of sectors, staples and banks have beaten, whilst miners have missed expectations so far.
Turning to the war in Ukraine, the Financial Times reported over the weekend that Russia’s President Putin is no longer interested in diplomatic efforts and is focused on territorial gains.2 The World Bank estimates that physical damage to Ukraine and its infrastructure has reached roughly US$60 billion.
Sector performance divergence was significant again last week. Construction and materials and industrials stocks rose amid better-than-expected earnings reports last week. Banks were also higher amid a rising interest rate environment. In terms of laggards, basic resources stocks significantly underperformed last the week. Once again, earnings were the key driver, with a number of companies missing estimates through the week, citing cost and production issues.
The latest comments out of China with regards to COVID-19 restrictions were also particularly downbeat, talking of lockdowns rather than stimulus. Health care stocks also underperformed last week amid profit-taking and as defensives came under pressure. Also, as COVID-19 restrictions eased once again in Europe, Goldman Sachs’ Stay at Home index was down 6% last week and is down 30% year-to-date.3
Weak UK macro data saw the sterling slump to lowest level since 2020. UK GfK consumer confidence balance fell to a reading of -38 in April, which was the second lowest on record—just one point above the -39 reading in July 2008 ahead of the global financial crisis (GFC). In addition, UK Retail March Sales fell 1.4%. Markets will be watching the Bank of England meeting 5 May, when a 25 bps rate hike is expected.
Last week was tough for US equities, with headwinds in the form of hawkish Fed commentary (as discussed) and some notable earnings disappointments. The S&P 500 Index was down 2.8% on-the-week and the Nasdaq 100 Index declined 3.9%, down 10% for the month, its worst monthly performance since the GFC. Rising bond yields hurt technology names, and streaming service Netflix plunged -37% last week amid an earnings miss.
Looking at sector performance, only real estate investment trusts (REITs) and consumer staples were in positive territory. Meanwhile, communication services lagged amid the Netflix earnings miss, and energy stocks fell amid a drop in crude oil prices.
The CNN Fear & Greed index has slipped back into Fear territory, though still comfortably above Extreme Fear levels.4 Something to keep an eye as we progress through earnings season.
Last week was poor across Asian markets in general, with the MSCI Asia Pacific Index closing the week down 2.5% amid a late selloff on concerns around last Thursday’s hawkish Fed and ECB comments.
Mainland Chinese stocks closed the week down 3.87% amid continued economic fallout caused by ongoing COVID-19 lockdowns, pressure on the property sector and policy easing disappointment. Rising COVID cases in Beijing sparked jitters about an unprecedented lockdown of the capital, with policymakers racing to avert a Shanghai-style crisis that has already wrought havoc on the financial hub.
Consequently, analysts continue to downgrade their estimates for gross domestic product (GDP). On Monday, the People’s Bank of China (disappointingly) lowered its reserve requirement ratio (RRR) for financial institutions and certain regional banks, effective 25 April. It also announced a number of measures to support individuals and small businesses.
The Chinese currency continued to weaken last week (not helped by the Fed’s hawkish comments) and is likely to weaken further this year due to slowing exports, faster US interest-rate hikes and the potential capital outflows from emerging markets.
Hong Kong’s market reopened on Tuesday after the Easter break and closed last week lower as pressure continued on the technology sector over government regulation. A potential delisting of US-traded shares also dampened sentiment.
Japan’s market fared better, closing the week up 0.04%. However, yen weakness continues to attract scrutiny, with Japanese government officials sounding more warnings about the negative economic consequences. The Bank of Japan (BoJ) has vowed to continue prioritising monetary easing until the price stability target is achieved in a stable manner. Consumer Price Index (CPI) inflation continued to lag other major developed economies—the core CPI in March came in at +0.8% year-over-year—remaining a key factor behind the BoJ’s continued pursuit of its loose monetary policy. The BoJ bought Japanese government bonds to defend the upper limit of its interest rate target range and announced fresh bond-buying plans.
Elsewhere, Samsung drove the South Korean market higher, and semiconductors underpinned Taiwan’s market, which closed up 0.12% last week.
The Week Ahead
Corporate earnings should continue to dominate attention in the United States and Europe this week, with a significant number of companies reporting. Of note, in the United States we have technology heavyweights Apple, Amazon, Microsoft and Alphabet all reporting earnings.
Last week Fedspeak was a market driver, but as we enter the blackout period ahead of the 4 May FOMC meeting, it will be quieter on this front.
Looking at macro data, we have a number of European data points that will be important given recent ECB commentary. Away from Europe, Chinese Industrial Profits on Wednesday and US GDP on Thursday will be important data points.
Monday 25 April
- Germany Ifo survey (expectations)
- Spain Producer Price Index (PPI)
- Eurozone construction output
Tuesday 26 April
- UK public finances (Public Sector Net Cash Requirement)
- US durable goods and manufacturers’ shipments
Wednesday 27 April
- Sweden trade balance and unemployment rate
- US housing inventories
- China industrial profits
Thursday 28 April
- Spain Consumer Price Index (CPI)
- Germany CPI EU Harmonized
- US jobless claims and GDP
- Japan retail sales and industrial production (IP)
Friday 29 April
- France consumer spending, GDP and CPI
- Italy GDP and CPI
- Spain GDP and retail sales
- Germany GDP
- Eurozone GDP and CPI estimate
- US personal income
Views You Can Use
The Middle East and North Africa (MENA) region has been resilient despite ongoing geopolitical uncertainty and rising inflation, according to Franklin Templeton’s Dino Kronfol and Salah Shamma. While Ukraine and Russia are remote from the region and linkages are not direct nor easy to identify, they give their views on how local economies are faring amid the volatility. Read more.
Despite increased volatility due to the Russia-Ukraine war and rising interest rates, Franklin Equity Group’s Jonathan Curtis sees compelling opportunities within high-quality technology companies in an increasingly digital world. Read more.
Many market pundits have advocated a strategy of “buying the dip” after significant selloffs, but does it always make sense to do so? Franklin Templeton Investment Solutions’ Gene Podkaminer and Miles Sampson explore market reactions to geopolitical events and caution against celebrating the success of this strategy too soon. Read more.
The war in Ukraine is shifting the conversation on what a post-COVID-19 world will look like. Franklin Templeton Investment Solutions Head of Research Gene Podkaminer, Brandywine Global’s Director of Global Macro Research Francis Scotland, and Templeton Global Macro’s Chief Investment Officer Dr. Michael Hasenstab join Head of Franklin Templeton Investment Institute Stephen Dover for a discussion on the current investment landscape. Read more.
The market lens for the rest of 2022 will be focused on the impact of political and policy miscalculations, according to Franklin Templeton Emerging Markets Equity CIO Manraj Sekhon. Read more.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
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: Financial Times, “Vladimir Putin Abandons Hopes of Ukraine Deal and Shifts to Land-grab Strategy”, 24 April 2022.
3. Indices are unmanaged and one cannot directly in invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
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.