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

Last week was tough for equity markets, with the MSCI World Index closing the week down 1.7%, the S&P 500 Index down 1.2%, the STOXX Europe 600 Index down 0.8%, and the MSCI Asia Pacific Index down 1.4%.1 Data remained a focus last week as the Chinese Industrial Production (IP), Chinese retail sales, German ZEW expectations, US housing, and UK consumer confidence were all weaker than anticipated. The latest UK Consumer Price Index (CPI) report came in much stronger than expected, which also captured attention last week. The Rhine water level also remains a focal point, with levels rising back above critical over the weekend after a few days of rainfall in Switzerland, easing fears for now.

Energy prices continue to be a focus for markets, with EU natural gas futures up 18.7% last week and US gas up 6.5%.

From a technical perspective, it was interesting to see both European and US futures markets trade up to their respective 200-day moving averages but fail to break through and quickly pull back last week. Outside of equity markets, the US dollar had a notable move higher again last week, with the Dollar Index (DXY) up 2.3% and trading back near multi-year highs. Also, the iTraxx Crossover (Xover) Index, which comprises 75 equally weighted credit default swaps (CDS) on the most liquid sub-investment grade European corporate entities, was up 12.9% on the week, signalling underperformance for highly-leveraged stocks.

Bond prices fell through the week as investors ramped up bets on central bank tightening after a few of the Federal Reserve (Fed) speakers reiterated their desire to fight inflation. Both UK and German bond yields rallied, with the 10-year gilts back through 2.4% and 10-year Bunds rallying back towards 1.25%.

The latest fund flow data showed a continuation of the risk-on theme for fund managers. The Bank of America and BofA Securities flow show report showed US$7.9 billion went to stocks, US$0.5 billion to bonds, US$0.7 billion from gold and US$5.0 billion from cash.2 European equity funds also shed another US$2.2 billion, the 27th consecutive weekly outflow, whilst US equity funds saw their second consecutive inflow of US$9.2 billion.3

UK economy: A “sense of exasperation”

UK macro data had another tough week at a time when the government is on autopilot until a new Prime Minister is announced. Last week’s datapoints included the following:

  • UK unemployment remained close to 50-year lows at 3.8%, UK real wages fell 3% in the second quarter, the fastest pace since records began 20 years ago.
  • We saw another record inflation print, with UK CPI 10.1%, the highest in 40 years and the highest in G7. Running at 12.6%, food-price inflation drove the reading.
  • UK GfK Consumer Confidence fell to a record low of -44 in August, lower than the previous -41 recorded in July, the lowest since records started in 1974. The Index and all sub-categories fell, which reflected acute concerns amid a soaring cost-of-living. Record inflation continued to erode buying power and personal finances, and the report suggests consumer confidence is likely to worsen in autumn and winter. GFK said the data shows(a) sense of exasperation about the UK’s economy is the biggest driver of these findings. They point to a sense of capitulation, of financing events moving far beyond the control of ordinary people.”4
  • A recent study suggested the energy crisis was having a far greater impact on disposable income than the 2008 global financial crisis (GFC) for most UK households, with disposable income looking to continue falling early next year.

In credit markets last week, the UK two-year/10-year spread inverted further than it did during the COVID-19 low, and that inversion is considered a signal of a forthcoming recession.

The energy crisis and Germany

European gas prices continued to edge back towards their year-to-date highs of +18% last week. They were up another 10% in European trading this morning after Russia announced an unscheduled three-day closure of Nord Stream 1 pipeline on 31 August for “maintenance”.

Interestingly, the Financial Times suggested last week that the current gas price is equivalent to US$400 a barrel of oil5, and as we get towards the end of summer, it is encouraging to see German gas reserves continue to rise, currently at around 77% capacity and aiming to get to 95% by November. These reserves will be crucial for the German economy through the winter; however, the Federal Network Agency said that gas reserves totalling 95% of capacity would only be enough to cover 2.5 months of heating, industrial and power demand if Russia cuts off supplies completely.6

We also saw German electricity prices for next year surge again last week, up 21.4%. As an indicator of concerns in Germany, German internet searches of “firewood” have soared, with people clearly anticipating a tricky winter.7

In addition, relatively low water levels in the Rhine are not helping sentiment and could continue to dampen German economic growth. The German ZEW Economic Sentiment reading was released last week and came in at its lowest reading since 2011. ZEW Expectations were at -55.3 vs. -53.8 previously. The latest reading is down towards the lows of the GFC. German house prices fell in July by 1.9%, their worst month since 2012, but are still up 6% year-on-year. The German Producer Price Index (PPI) report received some focus as well last week, coming in at +5.3% month-on-month, vs. +0.7% expected, with energy costs being the main driver for the rise, up 14.7% on the month in July.

Week in review


European equities traded lower into the end of last week, and the STOXX Europe 600 Index closed the week down 0.8%. Market volumes have been particularly poor, falling below €50 billion per day for the first time this year. With volumes low, the index has not moved more than 1% for any day in August (15 trading sessions). In terms of themes, focus was on the worsening economic picture throughout Europe, which dampened investor risk appetite.

In terms of equity market moves last week, we saw some reversals on certain themes from the previous week. Real estate stocks in Europe declined, giving back all their gains from the previous week and then some. Retail stocks struggled too, not helped by the UK inflation data as investors fear that inflationary pressures will begin to hit demand as consumers start to cut back as they spend more on energy bills. Hedge funds increased their shorts last week after a period of covering, with Citi’s EU Most Short basket down 6.1% on the week.8

The year-to-date winners outperformed last week, with oil and gas stocks up as power prices climbed to fresh record highs, with Germany’s one-year baseload electricity forward prices now up more than 300% year-to-date.9 Aero and defence stocks were also higher, and food and beverage, utilities and health care were all outperformers last week.

United States

US equities ended their four-week run of gains last week, as the S&P 500 Index fell 1.2% and the Nasdaq 100 Index fell 2.4%. After such a positive summer performance, many felt the market was due for a pull back. With many market participants on holiday, market news flow and volumes were quieter. In terms of themes, Fedspeak remained a key focus for investors, with the Fed minutes released and several Fed officials speaking last week. Market volatility increased, with the CBOE VIX increasing above 20, as last Friday’s options expiration of US$2 trillion added to volatility.10

From a technical perspective, the S&P 500 failed to break through resistance at its 200-day moving average, near 4,200.

Sector performance had a risk-off tone, with staples and utilities higher last week. Communications services closed lower. Beyond equities, we also saw cryptocurrencies struggle last week, with Bitcoin -11.7%. Meanwhile, Treasury yields climbed, while the US dollar capped its best weekly gain since April 2020.

The Fed policy meeting minutes showed that participants thought “at some point” it would likely become appropriate to slow the pace of hiking while assessing the impact from tighter financial conditions. The Fed staff’s forecast for economic growth was “noticeably weaker” than at the June meeting, while participants generally judged that the bulk of the effects of tighter financial conditions on economic activity had yet to be felt.

In addition, several Fed officials pushed back against any notions that the tightening cycle might be nearing an end, adding to the upside in bond yields. The comments included Neel Kashkari, who warned he wasn’t sure inflation could be tamed without a recession, and James Bullard, who noted he is “leaning toward” 75 basis points of hiking in September.

In this context, markets will be watching the central banker conference in Jackson Hole, Wyoming, on Friday, where Fed Chair Jerome Powell will be speaking.

In US macro data released last week, the Empire Manufacturing survey reading slipped to -31.3. New orders fell to -29.6.

With the market pullback and increased volatility, it was not surprising to see investor sentiment fall, with the CNN Fear and Greed index slipping back a little but remaining within Neutral.11


Asian equity markets were mixed as usual last week, with the MSCI Asia Pacific Index closing down 1.4% overall.

In China, as highlighted last week, the People’s Bank of China (PBoC) cut interest rates by 10 basis points (bps) to 2.75%, a sign policymakers are looking to inject cash into the economy to help cope with the latest COVID-19 lockdowns. The rate cut was the first since January of this year and comes on the back of poor economic data for July. Industrial production (IP) came in at +3.8%, weaker than anticipated, whilst retail sales also missed expectations, coming in at +2.7%.

In terms of sectors, Chinese property developers fared better on the back of the PBoC rate cut. Semiconductor stocks declined after the US Commerce Department issued an export-control rule the previous week, blocking China’s access to advanced design software needed to make next-generation chips.

Hong Kong’s equity market underperformed last week, down 2.0% overall. The economic data out of China weighed on equities there and highlight the difficulties facing the Hong Kong economy in emerging from COVID-19 lockdowns. Oil and gas stocks struggled, as oil prices fell amid an expected slowdown in global demand, whilst a number of China’s state-owned oil giants announced they would delist from the New York Stock Exchange.

Week ahead

Macro week ahead highlights

Minutes from the 21 July European Central Bank (ECB) meeting will offer clues as to whether investors should brace for another 50 basis point rate hike in September. Given widespread inflationary pressures, a large increase is the base case for most observers.

Flash Purchasing Managers’ Index (PMI) surveys for the euro area and the United Kingdom will provide more insight into the likelihood of those economies slipping into recession. The blow from the surge in energy costs seems to point in that direction.

Key events

Tuesday 23 August: Euro area flash composite PMI, UK flash composite PMI

Thursday 25 August: Germany IFO survey (expectations); ECB monetary policy account

Monday 22 August        

  • US: Chicago Federal National Activity Index (July)

Tuesday 23 August        

  • Euro area consumer confidence
  • Euro area flash Composite PMI
  • UK flash composite PMI
  • US: Richmond Federal Manufacturing Index (August), new home sales (July)

Wednesday 24 August     

  • US: MBA mortgage applications, durable goods orders (ex-transportation) (July), capital goods orders/ship non defense (ex air) (July), pending home sales (July)

Thursday 25 August        

  • European Central Bank monetary policy account
  • Germany IFO survey
  • Spain Producer Price Index (PPI)
  • France manufacturing and business confidence
  • US: Gross Domestic Product annualised/price Index, personal consumption, initial jobless/continuing claims, Kansas City federal manufacturing activity (August)

Friday 26 August           

  • Germany GfK consumer confidence
  • France Consumer confidence
  • Italy consumer confidence Index
  • US: advance goods trade balance (July), wholesale/retail inventories (July), personal income/spending (July), real personal spending (July), Personal Consumption Expenditure (PCE) deflator/ core deflator (July), University of Michigan Sentiment (August)

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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. “ ’Very Few Fear Fed’: BofA Says Cash Flooding Into Stocks, Bonds,” 19 August 2022.

3. Ibid.

4. Source: Growth from Knowledge (GfK), “UK consumer confidence hits a new record low of -44 in August,” 19 August 2022.

5, Source: Financial Times, “Gas markets leap on both sides of Atlantic as traders search for supplies,” 17 August 2022.

6. Source: Bloomberg, “German Gas to Last Less Than 3 Months If Russia Cuts Supply,” 1 August 2022.

7. Source: Google Trends.

8. Source: Bloomberg.

9. Source: Bloomberg, though 19 August 2022.

10. 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.

11. 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.

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