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 rallied into the end of last week, with the MSCI World Index closing up 3.0%, while the S&P 500 Index closed up 3.7%, the STOXX Europe 600 Index closed up 1.1%, whilst the MSCI Asia Pacific Index closed near flat, down just 0.03%.1 With sentiment extremely bearish, equity markets are susceptible to bear-market squeezes like the one we saw last week.

Headwinds persist and volatility remains, and investors seem to be looking beyond the immediate issues that have been weighing on stocks, giving the market short-term, risk-on moves higher. In terms of themes last week, focus was mainly on the European Central Bank (ECB) announcement on Thursday. Energy was also in focus as European leaders looked to take more serious action to protect consumers and businesses. In terms of equity fund flows, Europe recorded its 30th consecutive weekly outflow.2 Meanwhile, US equity funds saw their largest outflow in 11 weeks.3

ECB hikes rates by 75 basis points (bps)

On Thursday, the ECB announced that it would raise interest rates by 75 bps to 1.25%. A 75-bps hike represents the largest ECB hike in history. Inflation in the eurozone had surged to 9.1% in the year to August, so the ECB was under pressure to act. Before the announcement, the market was split between a 50 bp or 75 bp hike, so there was room either way for a small shock. With the announcement, ECB President Christine Lagarde stressed that “policy rates remain far below levels that ensure return of inflation to 2%” and that further hikes “over the next several meetings will likely be appropriate to slow demand and avoid persistent upward pressure on inflation expectations”. Any further hikes would be dependent on data.

This did represent a shift in rhetoric around the reasons for hiking rates. Previously, the ECB had said that rates hikes would ensure “that demand conditions adjust to deliver its inflation target in the medium term”. With the language a little more forceful, this could be taken as a hawkish signal to investors.

In terms of projections, the ECB revised up its inflation expectations significantly. The ECB now expects inflation to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024, up from 6.8%, 3.5% and 2.1% respectively projected back in June.4 Yet, the ECB does not anticipate a recession, reducing the gross domestic product (GDP) forecast to +0.9% for next year, down from +2.1% in June’s projections. There was no clear message on quantitative tightening in the statement, so it’s expected that the ECB will continue to reinvest the principal payments from its purchase programmes. PEPP reinvestments will continue at least until end-2024, and flexibility will remain. Lagarde advised that rates are the appropriate policy instrument at this time. On Friday, the Financial Times reported that the ECB has agreed to start discussions on shrinking its balance sheet in early October.5

Given the hawkish tilt to Thursday’s announcement, equities sold off nearly 1% afterward, but soon recovered ground to finish the day higher. The euro closed the week back above parity versus The US dollar. Attention now shifts to what the ECB does next. Reports towards the end of last week indicated that there was growing support for a further 75 bp hike in October. As mentioned, Lagarde said she expected the ECB to hike over the next “several” meetings. At the moment, the market is pricing in roughly 145 bps cumulative over the next three meetings. Given that the ECB has a history of hawkish surprises this year, this seems a little low, in our view.

European energy market

Last week started with an announcement from Gazprom that there would be an indefinite shutdown of Nord Stream 1. This was on the back of a scheduled shutdown which commenced on 31 August. Russia blamed European sanctions for the decision to cut off supplies, and European equity markets started last week firmly in the red, selling off nearly 2%. Yet, despite Nord Stream supplies being cut to zero, European Union (EU) governments announced impressive gas builds last week, using supplies from Norway and North Africa. The EU is currently at 83.6% capacity, Germany is at 88%, whilst France gas reserves are at 93.8% of capacity. These announcements raise hopes that Europe should be able to get through winter without running out of gas. Note, the EU imported 40% of its gas requirement from Russia last year, which has fallen to 9% in 2022.6

However, there is an inevitable knock-on effect, and attention shifted firmly last week to financial support for consumers. EU energy ministers met on Friday to try to produce a consensus resolution, but there was little concrete action. A price cap was not agreed upon, but does remain a possibility. However, it was stressed that a cap, even temporary, may threaten supply— so it comes with risks. The delegates also stopped short of calling for a mandatory reduction in energy demand and said that more work was needed to measure the impact of capping prices.

There was a headline last week suggesting that there was a proposal for an EU price cap of €200 MWH for non-gas electricity; however, this was not confirmed. Separately, Germany is considering taking direct action to avoid a wave of insolvencies through the winter.

In terms of action, the UK’s new Prime Minister, Liz Truss, announced a plan to freeze annual consumer energy bills for two years at £2,500. This replaces the prior decision by the regulator, Ofgem, to raise the energy price cap to £3,549 from £1,971. The plan, which may cost as much as £150 billion (6.5% of GDP), gives UK consumers protection over the next two years, UK retail stocks rallied last week after that news. The decision will also have a material impact upon inflation expectations in the United Kingdom, with inflation now likely to peak at current levels.

Many of the banks revised their inflation and GDP forecasts last week.

Week in review


European equities rallied into the end of the week to close up 1.1% overall. It was a poor start to the week, with the market opening lower on Monday on the back of news of the Nord Stream 1 shutdown. US stocks drove the late-week move higher after an initial selloff following the ECB announcement.

Outside of that, focus was on Friday’s EU energy meeting, and, in the United Kingdom, Liz Truss was appointed as the new Prime Minister following a lengthy leadership contest. Sentiment remains bearish although there is some encouragement for consumer stocks that European governments look to be protecting the public from the worst of energy inflation.

In terms of sectors, basic resources were strong last week, recovering most of their losses from the previous week. Commodities rallied into the end of the week on the back of property support measures in China/Hong Kong. Banks were also higher last week on the higher interest-rate environment, with many of the more rate-sensitive banks outperforming. In terms of the laggards, oil and gas stocks underperformed last week amid lower oil prices. It is difficult to pin down a driver of the underperformance on a week where we had OPEC cuts, China lockdowns and more chatter on windfall taxes.

Also, telecommunications closed the week down, with a little reversion at play as the sector has been one of the outperformers year-to-date. There was also a report that German consumers are displaying a reluctance to accept price hikes by mobile-phone companies, which dampened sentiment.

United States

US equity markets snapped a three-week run of declines and saw some decent gains last week, with the S&P 500 Index, DJIA and Nasdaq all rising. In terms of catalysts, a pullback in the US dollar after months of strength helped change sentiment. In addition, there is also some expectation that this week’s US Consumer Price Index (CPI) data could see another decline, so there is anticipation that we may have seen peak inflation. From a technical standpoint, the S&P 500, Nasdaq and Russell 2000 indices are now all back above their key technical 50-day moving averages.

From a central bank perspective, there was a lot of focus on the ECB’s actions. However, Fed Chair Jerome Powell did make a speech where he stuck to the hawkish message from Jackson Hole, Wyoming. He stated: “We need to act now, forthrightly, strongly as we have been doing. My colleagues and I are strongly committed to this project and will keep at it.” He said that the goal for the Fed is to have economic growth below trend for some time, to reduce pressure on the labour market from adding to recession concerns. This saw US year-end rate expectations increase to about 3.88% vs. 3.67% previously.

Sector performance was positive across the board with the materials and consumer discretionary names the best performers.

Looking to US macro data, the latest Institute for Supply Management (ISM) non-manufacturing survey picked up. The August ISM services component came in stronger than expected at 56.9 vs. 56.7 previously, suggesting that the US economy has maintained strong underlying momentum, despite high inflation and rising interest rates.


It was a ”game of two halves” this week in Asia, with the MSCI Asia Pacific trading lower on Tuesday and Wednesday, only to rally back on Thursday and Friday, tracking the S&P 500 Index in the United States to close the week basically flat. The rally in equities came after the US dollar fell last week after reaching its highest level since 2002. Comments from Japanese authorities indicating concern about the level and pace of decline of the Japanese yen helped trigger a wave of profit taking in the dollar.

Japan’s equity market closed the week higher after the government announced new measures to help the country cope with rising inflation, whilst the yen fell to its lowest level in 24 years, prompting fresh comments from officials. The 10-year bond yield fell to 0.23% from 0.24% at the end of the previous week.

The government announced a new relief package, due in October, to help the country cope with rising inflation. The package includes cash handouts to low-income households as well as measures to keep some commodity and food prices at current levels. Prime Minister Fumio Kishida stated that it was the government’s priority to protect both households and businesses from the impact of higher import prices due largely to the war in Ukraine.

Authorities issued their strongest warning yet on the weakness of the yen, a few days after the ECB raised interest rates by 75 bps. On Friday, the yen fell back below 142.50 after earlier touching as high as 145. Japanese officials said that they would take action to prevent “excessive, one-sided” moves in the exchange rate. It is unclear yet what steps authorities will take to arrest the decline in the yen, although Friday saw the largest appreciation in the currency in a month.

On the macro front, GDP expanded at an annualized rate of 3.5% in the second quarter, higher than expected. The easing of  COVID restrictions boosted the economy, which encouraged business spending and private consumption. While Japan’s economy has now regained its pre-pandemic size, there are some expectations that growth may slow due to the ongoing COVID-19 pandemic, supply chain disruptions impeding production, rising prices, and global economic uncertainty. Data this week in Japan includes  machine tool orders, the Producer Price Index (PPI), industrial production and trade figures.

Mainland China’s equity market also had a solid week, closing higher last week as better inflation data and expectations of further policy support prompted buying. Chinese inflation fell (despite expectations of a rise) which raised hopes of a cut in lending rates. PPI was also lower than expected, while new loans came in lower than expected.

Attempts by Chinese authorities to jumpstart the economy have been hampered by China’s “Zero-COVID” policy and by weakness in the property sector. Property shares rallied last week on hopes of more easing of home purchase restrictions including the potential removal of curbs and tax concessions for property transactions.

This week, China’s President Xi Jinping is expected to make his first foreign trip in more than two years. He is expected to travel to Kazakhstan and Uzbekistan, where he is due to meet with Russian President Vladimir Putin on the sidelines of the Shanghai Cooperation Organization.

China’s currency strengthened on Friday after being under pressure for the past three weeks. Earlier in the week, China cut the amount of foreign exchange that domestic banks must hold in reserves, a move seen as an effort to bolster the yuan. Financial institutions will be required to hold 6% of their foreign currency deposits in reserves starting 15 September, down from the current 8%, according to a People’s Bank of China statement.

Looking ahead, China is bracing for a typhoon this week. In a week where macro data including retail sales, industrial production, property investment and property sales figures will be reported, China is expected to keep its medium-term lending rate unchanged at 2.75%.

Hong Kong’s equity benchmark closed the week slightly lower. Stocks slumped for the first four days of the week amid growing concerns about the economic fallout from wider lockdowns in China and growing tension between US and China on tech exports. However, stocks snapped the losing streak and logged a strong rally Friday ahead of the long weekend, as a government report showing slower inflation in China helped boost the outlook for more monetary easing to shore up the economy. Chinese real estate developers ended the week strongly, with smaller creditors of embattled Chinese property firms increasingly turning to court to obtain payments. Chip makers struggled after reports that the White House is considering moves that would restrict US investment in Chinese tech firms, while later in the week, President Xi called for a stronger effort to pool nationwide resources to advance key technologies.

On the COVID-19 front, Finance Secretary Chan said that the city needed to raise its vaccination rate further to allow Hong Kong to re-open its borders. His comments came after press reports said that suicide rates of children under the age of 15 hit a record high in Hong Kong last year.

The week ahead

The death of Queen Elizabeth II at the age of 96, the longest-serving British monarch, has set into motion a lengthy period of national mourning and preparations for her state funeral. The Bank of England has postponed the interest-rate decision scheduled for 15 September (this will now be held on 22 September).

Elsewhere, markets will be focused on US inflation data for August, after price growth decelerated more than forecast in July. President Xi Jinping will make his first foreign trip in more than two years, as noted.

Key Events

Monday 12 September: UK Monthly GDP, UK Manufacturing & Industrial Production

Tuesday 13 September:  German, Spanish, and US CPI

Wednesday 14 September: UK CPI & RPI

Thursday 15 September: US Jobless claims, US Industrial and Manufacturing production

Friday 16 September:  Eurozone CPI

Monday 12 September

  • UK Monthly GDP
  • UK Manufacturing & Industrial Production
  • Italy Industrial Production

Tuesday 13 September

  • UK ILO Unemployment & Claimant Count Rate
  • Germany CPI, ZEW survey expectations
  • Spain CPI
  • US CPI
  • US Federal budget

Wednesday 14 September

  • UK CPI & RPI
  • Eurozone Industrial Production
  • US Core PPI

Thursday 15 September

  • France CPI
  • Italy General Government Debt
  • Eurozone Trade Balance
  • US Jobless claims
  • US Industrial & Manufacturing production
  • US Financial accounts

Friday 16 September

  • UK Retail sales Inc Auto Fuel
  • Eurozone EU27 New Car Registrations
  • Spain Labour Costs
  • Italy Trade Balance Total
  • Eurozone CPI
  • US State employment
  • US Total net TIC flows

Views you can use

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David Zahn, Franklin Templeton’s Head of European Fixed Income, offers some initial thoughts on the market implications of the election of new UK Prime Minister Liz Truss.  Read more.

Chinese equities poised to rebound after unsustainable low

Positive catalysts, such as the anticipated easing of both COVID-19 restrictions and geopolitical tensions, paired with  policy loosening, may help the Chinese equity market recover, according to Franklin Templeton Emerging Market Equity’s Michael Lai. He shares his latest outlook and where he finds investment opportunities. Read more. 

Dimensions & Insights: Diverse and inclusive practices unlock opportunities 

Diversity & Inclusion (D&I) practices unlock opportunities that might otherwise go unnoticed. Companies with greater ethnic and cultural diversity outperform in productivity and profitability and gain the ability to find and unlock innovations from anyone, anywhere. Our Chief Diversity Officer Regina Curry believes the debate is long over—the business case for D&I is proven and compelling. Read more.

On my mind: The Fed—Do you hear me now?

Fed Chairman Powell delivered a forceful and unequivocal message today at Jackson Hole, pushing back against market expectations of an early pivot back to rate cuts. Restoring price stability will require tight monetary policy for some time, he said, and the Fed will not waver when the labor market starts feeling the pain. Markets have taken notice, but will test the Fed’s resolve again, making for a volatile adjustment process in asset prices. Our Fixed Income CIO Sonal Desai shares her thoughts. Read more.

PODCAST: Investing in innovation–impacts of market volatility and shocks

Franklin Equity Group’s Renee Anderson and Matt Moberg cover investing in innovation during market volatility. We hear how business fundamentals and valuations look right now. Plus, from electric vehicles and renewable energy, to the metaverse, blockchain and more—a breakdown of which innovation themes have the most upside and challenges. 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: Bloomberg. “BofA Says ‘Appalling’ Mood Fuels $11 Billion US Stocks Exodus,” 9 September 2022.

3. Ibid.

4. There is no assurance any estimate, forecast or projection will be realised.

5. Source: Financial Times, “ECB to start talks on shrinking its balance sheet,” 9 September 2022.

6. Source: The Washington Post, EU nations struggle to find joint approach on energy prices, 9 September 2022.

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