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. As part of Templeton Global Equity Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, 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 higher last week, helped by a weaker-than-expected Consumer Price Index (CPI) in the United States on Wednesday. The MSCI World Index closed the week up 3.0%, the S&P 500 Index closed up 3.3%, the STOXX Europe 600 Index closed up 1.2%, and the MSCI Asia Pacific Index closed up 1.5%.1

The inflation print seemed like the sole focus for markets last week, with volumes particularly poor and investors seemingly in a wait-and-see mode through the first part of the week. The CPI report showed that 12-month inflation dropped from 9.1% in June to 8.5% through July, with investors hoping that this does signal a turning point in the trajectory of inflation prints. Outside of that, focus was on Zantac litigation fears in the health care sector, strength in the US technology sector, as well as drought concerns in central Europe. Fund flows were fairly risk-on last week, with large flows into bonds. US equities saw inflows, while European equity funds saw their 26th consecutive week of outflows US$4.8 billion.

CPI print raises hopes for US “soft-landing”

The US CPI report last Wednesday was the big focus for the markets, and it came in at 8.5% for the year to July, lower than anticipated and down notably from 9.1% in June, which was a 40-year high. Core inflation remained unchanged at 5.9% amidst drops in gasoline prices, as well as airfares and lodgings away from home. However, there were increases in prices for food, core goods and rent.

Again, attention quickly turned to the Federal Reserve (Fed) and the central bank’s possible policy response after the CPI data. The US dollar sold off 1% on the CPI headline, whilst global equity markets rallied. The softer data, combined with last week’s strong July employment report, raised hopes that the Fed could achieve a soft landing for the US economy. One more CPI report is due out before the next Federal Open Market Committee (FOMC) meeting in September, so there is an argument that August’s CPI print will be even more important to the interest-rate decision.

Retail gasoline prices continued to decline at the start of August, and further declines over the next couple of weeks would likely result in a negative headline CPI. Data is suggesting that airfares are also continuing to decline, helped by drops in oil prices. In addition, core goods prices should slow as import prices fall and with higher motor vehicle production in recent months.

Fed speakers were quick to try and calm the market excitement; however, they appeared keen to stress that there was no formal dovish pivot. All agreed that rate rises should continue through next year as inflation remains unacceptably high, but their comments failed to quell any market excitement and the US dollar sold off again through Thursday to reclaim the lows. The market is now pricing in a 55% chance of a 75 basis-point (bp) rate hike in September, down from an 80% probability this time last week. All eyes will be on the release of last month’s Fed meeting minutes, which are due to be released this Wednesday.


European equities finished higher overall last week, continuing to pull back from recent lows. The STOXX Europe 600 Index closed the week up 1.2%, with the US CPI print the key catalyst. Some 81% of the STOXX 600 companies have now reported earnings, and so far, we are seeing them beat expectations across the main metrics. In regards to earnings, consumer staples has been the winning sector so far, whilst real estate stocks have struggled.

Last week, travel and leisure stocks advanced amid better-than-expected earnings in the gambling space. Real estate stocks also rose amid the pullback in rate-hike expectations. The health care sector garnered the most attention last week, finishing lower amid nervousness over the ongoing Zantac litigation. Low summer market volumes likely exacerbated the selloff in the pharmaceutical sector.

Despite the strength in the market overall, a number of headwinds persist for European corporates, and one area of focus is the Rhine river water level, which continues to drop. This could have the potential to restrict the transportation of goods through central Europe, at a time when the continent is already suffering the worst energy crisis in decades. The Rhine is used to ship everything from fuels, chemicals and grains. Bloomberg reported last Friday that the water level had already fell below the critical 40-centimetre mark, a level where it becomes uneconomical for heavy ships to pass the chokepoint.2

The United Kingdom has also experienced a drought, recording the driest summer in 50 years, and the lack of rain has meant that crops have started to show signs of stress.

Power prices in Europe have continued to surge to new highs as the heatwave puts upward pressure on the energy network. We noted last week that French utility company EDF had reported that it is now running nuclear on lower output levels as there is not enough water to cool the reactors. The one-year forward power prices were up 13.2% in Germany last week, whilst in France they were up 14.6%.3

Germany’s top network regulator said last week that the country must cut gas use by 20% or face rationing gas, which will have an impact upon output. This is another reminder of how dependent the region is on Russian energy; Russia halted oil flows through a key pipeline amid overdue transit fees. These fees were paid on 12 August and the flows resumed, but the issues have highlighted how disruptive this could still become as we head into autumn/winter.

UK real gross domestic product (GDP) contracted by 0.1% in the second quarter, which followed a 0.8% gain in the first quarter. The second-quarter performance was a little ahead of market expectations for a contraction. UK GDP is likely to come into focus over the next few months after last week’s Bank of England prediction of a five-quarter recession starting in the fourth quarter of this year.

There has been a lot of chatter in the last week on whether European equities can continue to rally, as the MSCI Europe Index is trading at a new 20+ year low versus the MSCI US Index. However, the European economy still faces some strong headwinds.

United States

Last week’s softer-than-expected US CPI inflation data boosted hopes that the country could be past peak inflation, and US equities put in a strong performance amid improved sentiment. The S&P 500 Index closed above 4,200 for the first time since May, with the index up 3.3% last week. Other major indices also performed well, with the small-cap Russell 2000 index up 4.9% last week. It was also notable the CBOE VIX—known as the “fear gauge”—was down 7.5% last week, closing below 20 for first time since April.4

Remarkably, with last week’s moves, the S&P 500 Index and Nasdaq are up 18% and 24% respectively from their mid-June lows, which has demonstrated their strong performance over the summer.5

There has been a clear improvement in US investor sentiment and the CNN Fear & Greed Index is now on the cusp of a “Greed” reading, something that seemed a long way off less than two months ago when the gauge languished in “Extreme Fear.”6 In this context, US stocks saw inflows of US$11 billion last week, the biggest in eight weeks.7

Looking at sector performance last week, energy stocks surged on the back of a rise in West Texas Intermediate (WTI) oil after the US Energy Information Administration (EIA) lowered its forecast for US supply in 2023. In a “risk-on” environment, defensives lagged.

In terms of other US macro data last week, the July Producer Price Index (PPI) was down 0.5%, which added to the idea that inflation may have peaked. On Friday, the University of Michigan Confidence report saw a surprise uptick to 55.1, showing increased confidence, versus 51.5. and the near-term inflation expectations faded.


Last week was generally better in Asia, with the softer US CPI number helping stocks close the week higher overall.

Japan’s equity benchmark closed the week up 1.32%, as we saw Prime Minister Fumio Kishida reshuffle his cabinet following the Conservative LDP’s convincing win with its coalition partner Komeito in the parliamentary upper house election last Wednesday. Continuity has been retained, as he appointed many of his top colleagues in key positions. So, the “Abenomics” philosophy looks intact. Kishida also stated that fiscal spending would be used without hesitation to respond to inflation and rising coronavirus infections, as well as signalling that the government are looking to bring back their nuclear energy power plants online to help secure stable energy supplies.

Chinese equities rose overall last week amid news of a record trade surplus last month and a central bank report signalling support for growth. However, COVID-19 cases continued to climb to a three-month high, roughly half of them recorded in the island of Hainan, a popular holiday destination, which was widely locked down last week and caused many tourists to become stranded.

There was some economic news just out from the People’s Bank of China (PBoC) and the government:

  • The PBoC interest rates (after a slew of bad July economic data) by 10 basis points (bps) to 2.75%, the first reduction since January. It’s a sign that the central bank is  looking to inject cash into the economy to help cope with the continuing COVID-19 lockdowns.
  • More worryingly, July year-on-year Industrial Production (IP) missed estimates, coming in at 3.8% vs estimate 4.3%. Year-on-year July retail sales also missed by quite some margin as they came in at 2.7% vs estimate 4.9%.

Looking ahead to this week, the focus will be on corporate earnings. There are growing fears that China may be falling into a liquidity trap, with falling interest rates failing to stimulate demand. Earnings reports from major companies including Tencent, China Life and the major banks are ahead, and expectations are fairly bleak.

Stocks in Hong Kong closed the week down 0.13%, with technology/semiconductors under notable pressure in the wake of Micron’s warning of weaker chip demand. On Tuesday of last week, there was some  positive excitement as it was rumoured that the government may consider waiving extra stamp duty on homes for mainland Chinese buyers. However, this was subsequently disregarded by state officials.

The other big news was that Hong Kong had eased COVID-19 entry rules for international arrivals from last Friday, requiring them to remain in a hotel for three days before undergoing four days of “home medical surveillance” that will allow limited movement into areas where vaccine pass checks are not mandatory.

Finally, this coming week could see more tension between the United States and China as a US congressional delegation arrives in Taiwan. The visit comes 12 days after House Speaker Nancy Pelosi’s trip triggered some of the highest US-China tension  over the past 25 years. Beijing has asked countries, including India, to reiterate their commitment to the “One China” policy.

Week ahead

Monday 15 August

  • China IP, retail sales
  • Eurozone Bloomberg economic survey
  • US empire manufacturing
  • Japan GDP, IP

Tuesday 16 August

  • UK job data
  • Germany ZEW survey
  • Eurozone trade balance
  • US building permits, housing starts; IP

Wednesday 17 August

  • UK CPI, Retail Price Index, PPI
  • Eurozone employment, GDP
  • US retail sales, FOMC meeting minutes

Thursday 18 August

  • Eurozone construction output, CPI
  • US jobless claims, existing home sales

Friday 19 August

  • UK consumer confidence, retail sales
  • Germany PPI
  • European Central Bank current account

Views you can use

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On my mind: Are we there yet? 

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Investing in infrastructure: Why now?

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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, “Rhine to Recede Further as Climate Crisis Adds to Energy Crunch,” 13 August 2022.

[3] Source: Bloomberg. There is no assurance that any estimate, forecast or projection will be realised.

4. The CBOE Market Volatility Index measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Often called the “fear gauge”, lower readings suggest a perceived low-risk environment, while higher readings suggest a period of higher volatility. 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.

5. Source: Bloomberg. 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.

6. 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.

7. Source: Bloomberg, “BofA Says Cash Racing to Stocks, Bonds as Inflation Fears Ease,” 12 August 2022

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