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

Global equities sold off hard into the end of last week as inflation and growth fears continued to weigh on sentiment. The MSCI World Index closed the week down a sizeable 4.9%, and regionally, the S&P 500 Index closed the week down 5.1%, the STOXX Europe 600 Index closed down 4.0%, and the MSCI Asia Pacific Index  closing down 1.1%, missing much of the late Friday selloff.1 The focus for most of last week was Thursday’s European Central Bank (ECB) announcement and press conference, at which the central bank announced that it will stop net asset purchases on 1 July and start hiking interest rates next month. The ECB also cut its growth forecasts, triggering a notable selloff in equity markets.

Attention then turned on Friday to the latest US Consumer Price Index (CPI) print, with investors hopeful of seeing some signs that peak inflation had passed. However, the May report disappointed investors as it showed an acceleration.

Bank of America’s latest “Flow Show” report, which runs from Wednesday to Wednesday each week, showed a continuation of recent themes. We saw US$56.2 billion move into cash (largest in six weeks), with cash levels already at more than 20-year highs. European equity funds saw their 17th consecutive weekly outflow and lost another US$2.1 billion. Meanwhile, US equity funds saw a fifth consecutive inflow, up US$13.2 billion.2

ECB announcement

Bond yields have rallied hard in Europe so far this year, with the biggest quarterly rise in bund yields since 1994. This came with the market pricing in an end to the ECB’s Asset Purchase Programme (APP), a 25 basis points (bp)3 rate hike in July, and a total of 150-200 bps of hikes this year at a time when inflation is running at four times the ECB’s target of 2% (8.1% year-on-year in May). In a blog post in May, ECB President Christine Lagarde had already signalled that bond purchases would likely end this month, and that negative interest rates would end by September, lifting the deposit rate from -50bps to zero.4

In Thursday’s announcement, the ECB confirmed it would be raising interest rates in July. The initial hike will be 25 bps (the first rate hike in 11 years), followed by a further hike of possibly 50 bps, rather than 25 bps, in September. The decision on the size of the September hike will be based on inflation levels at that time. If inflation indicators hold at current levels, or worsen, then it is possible that members of the Council will opt for a 50 bp hike. The tone of the announcement on the subject of inflation was hugely different to the April meeting. In April, the ECB still showed concern that there was a risk that inflation would undershoot its 2% target in the medium term, whilst in the latest announcement they conceded inflation will likely “remain undesirably elevated for some time”. The central bank increased its inflation forecast to 2.1% for 2024, meaning inflation is now seen at 6.1%, 3.5% and 2.1% for 2022, 2023 and 2024, respectively.

The ECB also announced it would be ending quantitative easing through its APP on 1 July. Unlike the US Federal Reserve (Fed) or the Bank of England (BoE), the ECB will continue to replace maturing bonds under its standard APP “for an extended period of time” beyond the first rate increase. The central bank also announced it will reinvest principal payments from bond maturities under its Pandemic Emergency Purchase Programme (PEPP) “until at least the end of 2024”.5

US inflation

After the ECB announcement, focus shifted to the US CPI print last Friday. Investors were hoping for any signs at a high-level that inflation was peaking or had peaked. However, the May CPI report showed inflation at +8.6% year-on-year (the highest since December 1981), and up 1% versus April. Airline fares had a third monthly surge, rising 12.6% month-on-month, whilst energy prices were also strong, up 3.9% on the month. There was broad-based strength across goods, shelter and discretionary services. Both new and used vehicle inflation accelerated to 1% and 1.8%. Rental prices rose 0.6%, a stabilisation at least, but at the highs.

Risk assets sold off on the back of the release, with the market now pricing in three 50 bp hikes in June, July and September. The latest report seems to indicate that the Fed’s 75 bps of hikes so far have had minimal impact on curtailing inflation. With oil and other commodity prices up again from the end of May, it seems like there will still be that driving force behind the June print, meaning this month could see higher inflation still. We have seen a flattening of the Treasury yield curve, with the two year-10 year yield curve inverting for the first time since April. This has historically been a signal that the economy could move into a recession, which has been a hot topic of late for markets.

Starting this week…

European equities are starting the week lower, with several factors out there weighing on risk sentiment:

  • The UK government is expected to unveil new legislation unilaterally amending the Northern Ireland protocol, which will likely cause an escalation in tensions between London and Brussels.
  • There are fears over an increase in COVID-19 infections in China, meaning further lockdowns and another hit to growth.
  • There were reports over the weekend that China’s Defence Minister, General Wei Fenghe, had warned of the risk of war over Taiwan independence, saying China will “fight to the very end” to stop Taiwan from declaring independence.6
  • Cryptocurrency has come under pressure since the US CPI print, with Bitcoin down another 10% over the weekend and trading at US$25,000, the lowest level since December 2020.
  • French President Emmanuel Macron suffered a setback—he is at risk of losing his outright majority following a strong challenge from a coalition of left-wing parties in the National Assembly elections.
  • UK gross domestic product (GDP) disappointed in April, falling 0.3% on the month. Manufacturing fell 1.0% month-on-month (m/m), despite a surge in auto production in April, while services output fell 0.3% m/m.
  • The latest Swedish house price indicator dropped to its lowest level in two years, potentially signalling a worsening in economic conditions there.
  • Finally, this is all ahead of the interest rate announcement by the Federal Open Market Committee (FOMC) on Wednesday (+50 bps expected) and BoE on Thursday (market split between +25 bps and +50 bps).

Week in review


European equities sold off last week, with investors gripped by inflation and the prospect of recession during a week where the World Bank, Organization for Economic Co-operation and Development (OECD), ECB and the Bundesbank all cut growth forecasts. The STOXX Europe 600 Index closed the week down 3.95%.

All sectors in Europe closed lower last week. Oil and gas stocks fared better than most as oil prices rose last week, but the sector still closed down. The banks and the financials were hit the hardest amidst the ECB announcement, together with another profit warning from Credit Suisse.

United States

It was a torrid week for US equities, which suffered sharp declines across the board. The S&P 500 Index fell 5.1%, its second-worst weekly performance of the year and is once again testing year-to-date (ytd) lows. The Dow Jones Industrial Average fell 4.6% and the Nasdaq 100 Index  fell 5.7%. The stronger-than-expected US CPI and the fallout from the ECB rattled investor sentiment, prompting a sharp de-risking ahead of the weekend.

A notably weaker-than-expected University of Michigan consumer sentiment survey added to investor unease last Friday. It came in at a record low of 50.2, comparable to the trough of the 1980 recession. All components of the sentiment index fell, with the largest decline in year-ahead outlook in business conditions. Consumer assessment of personal financial outlooks worsened, with 46% attributing negative views to inflation, a number only exceeded once since 1981.

In that context, the S&P 500 Index fell 2.9% on Friday alone, with tech stocks hit particularly hard.

Energy names were the best-performing last week, albeit still with small losses overall, while bank and technology stocks were the worst performers. Last week also saw further pressure on US retailers, with Target warning again as it looks to discount excess inventories.

Looking to other asset classes, there was no respite for commodity prices, with West Texas Intermediate crude oil up 4.2% from the end of May, and other commodities likewise higher over the same period. The move in bond yields and flight to safety saw the US dollar continue to strengthen vs. other major currencies. Crypto saw sharp declines, with Bitcoin making 52-week lows, down 10% last week. The US 10-year Treasury yield tested a key support at 3.15%, up 22 bps last week.

Somewhat surprisingly, US equities attracted inflows in the week ending 8 June, marking a fifth straight week of inflows.


It was a mixed week across the Asia region, with stocks in Hong Kong and China outperforming and Australia the standout underperformer.

Japan’s benchmark index closed the week up 0.23% on economic news, with data showing that the economy had shrunk by about -0.5% in the first quarter, better than expected.

The reopening of tourism also provided a boost, and exporters benefitted from a weaker yen, which closed  lower vs. the US dollar last week. Prime Minister Fumio Kishida announced the government’s “new form of capitalism”, with a focus on income redistribution and green transformation.

Hong Kong’s benchmark index closed the week up 3.43%, with positive technology news out of China lifting the market. Risk appetites further improved after China approved 60 new games licenses on 7 June, and investors expect continued regulatory normalisation. Electric vehicles rose after manufacturer BYD posted strong vehicle sales in May despite COVID-19 headwinds. It is reported to supply batteries to Tesla while boosting its A-share repurchase. Meanwhile, local media reported that the city aims to implement shorter quarantine for arrivals from the summer period, if the COVID-19 situation remains stable.

Mainland Chinese equities had a good week, closing up 2.8%, mainly driven by the tech sector and hopes for looser monetary policy, despite some poor COVID-19-related news. On the technology front, The Wall Street Journal reported that regulators are ending their probe into DiDi Global and will restore its apps back on domestic app stores.7 It was also reported in the media that authorities are in talks about reviving the initial public offering for Ant Group, which was pulled back in December 2020 after Alibaba founder Jack Ma made critical comments about China’s financial regulators. Both developments signalled that Beijing is dialing back its regulatory clampdown on the tech sector that started in late 2020. On the economic front, China’s trade surplus rose to US$78.76 billion in May, up from US$51.12 billion in April.

Regarding COVID-19, Beijing is facing tighter restrictions amid an outbreak that officials described as “explosive”. Meanwhile, Shanghai restricted indoor dining in some districts amid reemergence of community infections.

Australia’s benchmark equity index closed the week down 4.2%, its worst week since April 2020, after the Reserve Bank of Australia lifted interest rates 50 bps to 0.85%.

South Korean equities closed the week down 2.8% due to large cash selling from foreigners. Comments from Intel’s CFO on a weak chip environment also contributed to the weak sentiment.

Week ahead


Monday 13 June: Greece, Russia, Romania

Thursday 16 June: Poland

Key Events

Monday 13 June:  UK monthly GDP

Tuesday 14 June: UK unemployment rate; Germany ZEW Expectations Survey

Wednesday 15 June: US FOMC interest-rate decision; euro area industrial production (IP)

Thursday 16 June: BoE bank rate

Friday 17 June: UK retail sales; euro area final CPI inflation

Monday 13 June

  • UK monthly GDP
  • UK IP
  • UK manufacturing production

Tuesday 14 June   

  • UK unemployment rate
  • Germany ZEW Expectations Survey
  • Germany CPI
  • US PPI final demand

Wednesday 15 June

  • Euro area IP
  • France CPI
  • US FOMC interest-rate decision
  • US retail sales
  • US MBA mortgage applications
  • US empire manufacturing

Thursday 16 June 

  • BoE bank rate
  • Netherlands unemployment rate
  • Spain labour costs
  • Italy CPI EU harmonized
  • US housing starts
  • US initial jobless claims

Friday 17 June     

  • UK retail sales; euro area final CPI inflation
  • Eurozone CPI year-on-year
  • US IP

Views you can use

ECB jumps on the bandwagon to start hiking rates

The European Central Bank held its June meeting this past week, and while it didn’t raise interest rates this time, it signaled rate hikes would begin in July. David Zahn, our Head of European Fixed Income, offers his take on the meeting, noting the central bank has turned more hawkish than many expected. Read more. 

Highlighting ETF liquidity during times of stress

The stressful events markets have faced this year have led to questions about ETF liquidity. Jason Xavier, Head of EMEA ETF Capital Markets, explores the subject. Read more. 

India: Three Themes Driving Growth

India is a dynamic urbanizing economy with a rapidly expanding middle class. Read more about this vast economy and why it is an attractive investment destination, from our Emerging Markets Equity’s Sukumar Rajah. Read more.

Making the Case for Municipal Bonds Despite Recent Volatility 

The first half of the year has so far been challenging for investors in municipal bonds. Ben Barber, Director, Municipal Bonds, Franklin Templeton Fixed Income, shares his latest outlook and reasons for optimism. Read more.

Reasons for Optimism in UK Equities 

Despite concerns about rising interest rates, a growth slowdown and stock market volatility, there are reasons to be optimistic about the outlook for UK equities, according to Martin Currie’s Ben Russon. He shares the latest data counteracting the cost-of-living crisis, trends that exhibit the strength of the UK economy relative to the rest of the world, and where he sees opportunities in the UK stock market. 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: Reuters, “Gap between US and European equity flows deepens,” 10 June 2021.

3. One basis point is equal to 0.01%.

4. Source: “Monetary policy normalisation in the euro area”, blog post by Christine Lagarde, president of the ECB, 23 May 2022.

5. Source: ECB.

6. Source: Reuters, “Taiwan says it’s willing to engage with China, doesn’t want to close the door”, 12 June 2022.

7. Source: The Wall Street Journal, “China to Conclude Didi Cybersecurity Probe, Lift Ban on New Users”, 6 June 2022.

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