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 finished relatively flat last week following the release of the US July employment report. The MSCI World Index closed the week up 0.21%, the S&P 500 Index closed the week up 0.4%, the  STOXX Europe 600 Index was down 0.6%, whilst the MSCI Asia Pacific Index was up 0.3%.1 The US reported very firm job gains in July, with nonfarm payrolls coming in at 528,000, which was higher than expected. However, average weekly earnings have slowed from the highs and are in deeply negative territory in real terms.

After the release of the jobs report, investor attention quickly turned to the Federal Reserve (Fed), with a 75 basis point (bp) interest-rate hike now expected for September. Two more Consumer Price Index (CPI) reports are expected before that announcement, the first of which is on Wednesday this week.

The other key focus last week was the Bank of England’s (BoE) policy meeting. The central bank hiked rates by 50 bps, which was largely as expected, but it was the bank’s estimates for a five-quarter recession starting in the fourth quarter of 2022 which garnered the most attention.

Energy prices were a focus once again last week, with oil prices at their lowest level since Russia’s invasion of Ukraine. Yet, geopolitical tensions between Russia and Europe remain heightened, with gas supplies restricted by Russia’s political posturing. Meanwhile, US Speaker of the House of Representatives Nancy Pelosi’s visit to Taiwan has caused some shockwaves and signalled a deterioration in US-China relations.

US jobs report—good news bad news for equities?

As stated, July’s employment report came in at an impressive increase of 528,000 jobs, well ahead of expectations. The report is a good sign for the US labour market and the broader US economy in general. The risk for equity markets is that the Fed is likely to have to do more to cool inflation. The Fed raised rates by 75 bps at the end of July, which followed a 75 bp hike in June. The market is now pricing in an 80% chance of another 75 bp hike by the Fed in September. The jobs report seemed to end hopes of an imminent dovish pivot as it throws cold water on the idea of a significant cooling in labour demand. Comments from various Fed speakers last week were notably hawkish even before the data was released, noting high inflation.

BoE challenges for the UK economy

Last Thursday’s BoE policy meeting provided a stark reminder of the challenges facing the UK economy. As expected, the Monetary Policy Committee raised interest rates by 50 bps, taking the base rate to 1.75%, and detailed plans for Quantitative Tightening (QT). The bank has now raised rates  for six meetings in a row. However, what drew the most attention was its bleak outlook for the UK economy. The fourth-quarter inflation target was raised to 13.2%, and the central bank predicted the UK economy would enter a recession in the fourth quarter that would last through all of 2023.

The central bank decided to hike quite aggressively in the face of an economic downturn, meaning it is preparing for a hard landing to bring inflation back to target.

Key takeaways from the BoE meeting:

    • Interest rates were raised by 50 bps (to 1.75%) for the first time since 1995. Vote was 8 to 1, a convincing majority.
    • QT for after the September policy meeting at a pace of £10 billion a quarter, £80 billion total cut to gilt holdings in the year from September, including redemptions.
    • UK inflation is seen peaking at 13.2% in the fourth quarter as average energy bills will likely increase by 75% to around £3,500 ($4,240) in October.
    • Inflationary pressures have “intensified significantly,” the BoE said. “The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom.”
    • The BoE sees UK economy entering recession from the fourth quarter. Predicting a recession that lasts for five quarters, so all the way through 2023, with a gross domestic product (GDP) decline of 2.1%.
    • Guidance of forceful action if inflationary pressures persist was kept. That may put further 50 bps moves on the table at upcoming meetings.
    • BoE Governor Andrew Bailey said “all options” are on the table for future meetings.

The British pound finished the week down 82 bps vs the US dollar. In the gilt market, the two and 10-year yield curve inverted for first time since 2019, a relatively reliable lead indicator of a recession.


European stocks traded down last week following a late sell-off after the US employment report release. Sentiment appeared relatively supportive throughout the week in equity markets, despite a series of headwinds lingering. The BoE announcement was the clear focus for the region. European industrials remain a focus for investors, with power prices surging to new highs again last week. In addition, the Rhine water level is at its lowest in 25 years. This could have significant impact on industrial production in the region; supply chains have become disrupted once again as goods cannot be shipped to end markets. There are reports of France having to run nuclear on lower output levels as there is not enough water to cool the reactors.

Last week was the 24th consecutive week of outflows from Europe-focused funds.

In terms of sector moves, banks outperformed given the expected higher-rate environment, and the  BoE announcement and hawkish Fed in mind. For the same reason, real estate stocks struggled, finishing down last week. Crude oil prices saw their biggest weekly drop last week since March 2020, putting oil stocks under pressure. Despite the headwinds, the latest corporate earnings season has surprised to the upside. Energy has been the winning sector so far, whilst real estate has been the losing sector.

United States

US equities recorded small gains last week as the July employment  report alleviated recession fears a little. The S&P 500 Index closed up 0.4%, recording its third straight week of gains. Geopolitics was a focus for US markets as House Speaker Nancy Pelosi visited Taiwan, renewing tensions with China. Prior to the visit, China threatened “serious consequences” if Pelosi went ahead with her visit. The extent of China’s intended response is unknown, with investors fearing that global trade could be impacted.

There was a clear rotation in the US equity markets last week, with energy stocks selling off and technology stocks rallying. Energy has been the standout performer year-to-date, so with West Texas Intermediate crude oil prices down nearly 10% last week, investors decided to take some profits. Low market volumes likely exacerbated the selloff in the sector. Technology stocks outperformed amid solid earnings in the space. The outlook remains constructive, and value stocks have been delivering stronger revenue and earnings-per-share than growth stocks.


Asian equities traded higher overall last week, with the MSCI Asia Pacific Index closing the week up 0.25%. The escalation in US/China tensions is a focus for the region. Chinese equities were in risk-off mode last week as foreign investors reduced their exposure amid a ramping up of geopolitical risks. July’s Purchasing Management Index (PMI) report also weighed on sentiment. It missed expectations, indicating that the recovery may be short-lived, especially as COVID-19 control remains a key focus for the government.

However, trade data reported over the weekend showed China’s exports are expected to maintain a high rate of growth in the third quarter, while Chinese imports are expected to experience a further recovery. The significant increase in exports to the European Union influenced by tight energy supply, provided a key boost to exports in July.

The week ahead

Monday 8 August

      • Eurozone investor confidence

Tuesday 9 August

      • US NFIB Small Business Optimism; Non-Farm Productivity; Unit Labour Costs

Wednesday 10 August

      • Italy CPI
      • Germany CPI
      • China CPI, Producer Price Index (PPI)
      • Japan PPI
      • US CPI, real average earnings

Thursday 11 August

      • US PPI, jobless claims

Friday 12 August

      • UK GDP, imports/exports; Industrial Production (IP); Manufacturing Production; construction output; total business investment
      • France CPI
      • Spain CPI
      • Italy trade balance
      • Eurozone IP
      • US import/export price Index; University of Michigan Sentiment, current conditions, expectations


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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, “Bailey Says BoE Concerned UK Companies Are Raising Their Prices,” 5 August 2022.

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