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 broadly higher last week, with the MSCI World Index up 3.6%, the S&P 500 Index up 4.7%, the STOXX Europe 600 Index up 1.3%, whilst the MSCI Asia Pacific Index closed down 1.5%.1 The bounce last week was mainly attributed to technical factors, as we some of the most-shorted stocks outperformed. In the latest Bank of America Fund Manager Survey, bearish market sentiment was highlighted. Cash levels hit their highest level since 2001, and with 49% of investors underweight equities, this seemed to set up a strong reversal of recent losses.2 Also, comments on Friday in the Wall Street Journal regarding possible Federal Reserve intentions at upcoming meetings were taken as dovish, helping the market close out the week strongly. A 20% fall in gas prices—now down 66% from their peak—aided equities in Europe. But a number of headwinds persist.

There is turmoil in UK politics, with the “new” Prime Minister, Liz Truss, announcing her resignation following a dreadful 44 days in office. Also, earnings have disappointed overall so far, and stocks that did report last week fared poorly. In Asia, there were reports that China’s President Xi Jinping plans to push on with the country’s “Zero-COVID” policy. Finally, the moves higher last week were on lighter market volumes, with commentators using that to question the strength of conviction.

Change once again at Downing Street

Thursday brought Liz Truss’ resignation after just 44 days as UK prime minister. Calamitous decision-making by the “new” government caused turmoil in UK markets over the last few weeks, forcing the replacement Chancellor, Jeremy Hunt, to withdraw almost all of the pledges of his predecessor, Kwasi Kwarteng. The reversal of these plans was positive for markets, but terminal for Truss. Hunt’s announcement made Truss’ position untenable, and her resignation on Thursday made her the shortest-serving prime minister in UK political history.

Sterling rallied against the US dollar for a short while before paring all of its gains. Gilt yields rallied into the end of the week following reports that former Prime Minister Boris Johnson, in a bizarre twist, was among the favourites to stage a comeback for the role, stirring up market jitters.

Any contenders in the leadership contest needed the backing of 100 Conservative members of parliament (MPs) just to get into the ballot.

In the end, Rishi Sunak was declared prime minister. Sunak is the more market-friendly option, and the fiscal pivot Chancellor Jeremy Hunt delivered last week is likely to be cemented, with more fiscal tightening likely. Sterling rallied versus the US dollar on the news, whilst bond yields pulled back, with the UK two-year yield below 3.5%. There has been a lot of stress in UK credit markets since Truss took power, so Sunak’s confirmation should be a welcome relief. UK domestically exposed stocks also rallied.

Attention should likely shift to the government’s fiscal plan, which is due for announcement on 31 October. Chancellor Jeremy Hunt faces a tough challenge to balance the books, and reports suggest he is considering up to £20 billion of tax rises in the upcoming budget. It is thought that Hunt and Sunak are much more aligned on fiscal matters, so we don’t expect too many market shocks like we had in the aftermath of Kwasi Kwarteng’s mini-budget at the end of September.

Week in review


Last week was interesting for European equities, ending with a rally that pushed the market into positive territory. Technical factors seemed to drive the rally at the start of the week, with the year-to-date underperformers and the most-shorted stocks leading the way. In terms of the macro picture, UK political turmoil was the key focus for markets.

Attention has also begun to shift towards the latest earnings season, with around 15% of the STOXX Europe 600 Index reported last week. Earnings will really pick up pace this week. In terms of fund flows, European-focused equity funds recorded their 36th consecutive weekly outflow.

Sector performance divergence was significant last week. The technology sector gained last week, tracking the bounce in the United States on short covering and following ASML’s earnings beat. Autos were also higher last week following the well-received Paris Auto show and a solid European car sales number for September.

Banks were also stronger on the week. Earnings in the space were off to a solid start despite a report in the United Kingdom that Jeremy Hunt was “preparing to raid the profits of banks” in his budget (if it happens). Meanwhile, the defensives lagged last week, including telecommunications, food and beverage and health care. Aero and defence stocks were up once again, amidst a focus on European defence spending. Also, European airlines managed to hold on to their recent gains after some supportive earnings reports.

Falling gas prices in the European Union (EU) helped market sentiment last week; reports show gas storage is at 92% of capacity, which is above average for this time of year. There were also further reports of the European Commission using purchasing powers in negotiations with global gas suppliers and on implementing a framework which would allow for a cap on the price of gas. Mild recent weather and ample supplies have helped drive further price declines as we kick off this week. Falling prices are a welcome boost for businesses around Europe.

United States

US markets recovered ground last week, bouncing from the year-to-date lows made in the prior week. Gains were broad based, with the  S&P 500 Index, the Dow Jones Industrial Average, Nasdaq and the small-cap Russell 2000 Index all closing higher last week.

Yet again, energy names led the market higher, with technology stocks also market leaders.  The defensives lagged in a more “risk-on” environment.

Of note, Friday was a strong session, with the S&P 500 Index up 2.4%, thanks to a Wall Street Journal article suggesting the Fed will discuss slowing the pace of rate hikes. San Francisco Fed Bank President Mary Daly also suggested discussion could turn to planning reductions in the pace of rate hikes. She stated: “It should at least be something we’re considering at this point, but the data hasn’t been cooperating.”

That said, earlier in the week US Treasury yields had widened as Minneapolis Fed Bank President Neel Kashkari struck a more hawkish line, stressing that there is no Fed pivot in sight. There will be no Fed speakers this week with the Fed in black out period ahead of its next meeting (2 November).

On this theme, last week’s BoA Fund Manager Survey showed a majority of respondents see the Fed ending its hiking cycle in the first quarter of 2023 (vs. the second quarter 2023 in the prior survey).3

Looking at other gauges of investor sentiment, fund flow data was encouraging in the United States, with equities seeing inflows in the past two weeks. The CNN Fear & Greed Index has rebounded sharply to a “Neutral” reading, having only been in “Extreme Fear” territory just two weeks ago.4  


Last week was another tough one for Asian markets, as the MSCI Asia Pacific Index closed lower, as well as regional markets in Hong Kong, China and Japan.

As Asian currencies weaken in the face of a rising US dollar, regional economies are at threat of importing inflation, forcing local interest rates higher.

The continuing fall in equity prices is prompting authorities in South Korea and Taiwan to contemplate a short selling ban on equities, support for the credit market and intervention in the domestic currency.

Japan’s equity benchmark declined last week on the back of global recessionary fears and further currency weakness. The yen had a torrid time, almost hitting 152 on Friday vs. the US dollar. Interestingly, the currency closed stronger on Friday after Japanese authorities were thought to have intervened for the second time in a month, although the ministry of finance did not confirm the action.

Elsewhere, investors refocused on the impact of higher US interest rates and a looming global recession after a two-day rally, while September core inflation ballooned to an eight-year high of 3%, exceeding the central bank’s 2% target for the sixth successive month.

The Bank of Japan (BoJ) meeting this week is likely to reiterate its support for easing policies despite the BoJ’s reduction of its balance sheet by more than any other central bank in the past few months.

Hong Kong’s market likewise declined last week, hitting a 13-year low on Thursday. Unsurprisingly, all eyes were on the Party Congress meetings last week.

The property sector traded lower after John Lee’s disappointing policy address, where he talked about refunding stamp duty for non-residents only after staying in Hong Kong for seven years. Semiconductor stocks dropped last week after reports the US may announce more curbs.

Developments in China, with Xi seemingly imposing absolute power, seem to have spooked markets in the first day of trading this week.

China’s equity market also closed the week lower, with the focus on the 20th Party Congress. President Xi removed his opponents from power and put his close allies into all the major seats of power. In addition to this, last Monday Beijing delayed releasing key economic data without explanation, which didn’t help the markets. The delay raised speculation that the third-quarter gross domestic product (GDP) report would show China’s economy was on track to miss the official growth target of c. 5.5% this year and that officials sought to avoid any fallout from its release during the weeklong Congress.

Sector-wise, tech shares weakened, pressured by reports that officials from the Ministry of Industry and Information Technology held emergency meetings with domestic chipmakers regarding the Biden administration’s recently announced restrictions on technology exports to China. Tourism, hotel, food and beverage, retailers and auto also dragged on the indices as the number of domestic tourists/tourism revenue during 2022 National Holiday both hit the lowest levels since the COVID outbreak in 2020. Property developer shares advanced on reports that the China Securities Regulatory Commission will allow certain companies with small property interests to raise money by selling domestic shares.

Week ahead

The key focus for this week will be the European Central Bank (ECB) meeting on Thursday, with a 75 basis point interest-rate hike expected. ECB President Christine Lagarde will also speak, likely to reiterate that quantitative tightening will begin after interest-rate normalisation has completed. The US GDP report on Thursday will also be closely watched. Earnings season gets into full swing this week, so focus will be on corporate reporting.

Monday, 24 October

  • France Purchasing Manager Indices (PMIs)
  • Eurozone PMIs
  • UK PMIs
  • US PMIs

Tuesday 25 October  

  • Spain Purchasing Managers Index (PPI)
  • Germany IFO survey
  • US Conf. Board Consumer Confidence/Expectations

Wednesday 26 October

  • Japan PPI
  • Australia Consumer Price Index (CPI)
  • France Consumer Confidence
  • US New Home Sales
  • Bank of Canada monetary policy meeting and interest-rate decision

Thursday 27 October

  • China Industrial Profits
  • Germany Consumer Confidence
  • Spain Unemployment Rate
  • Italy Consumer Confidence, Industrial Sales
  • European Central Bank rate decision
  • US GDP, Personal Consumption, Initial Jobless Claims

Friday 28 October

  • Japan Jobless Rate
  • Germany CPI France GDP, Consumer Spending, CPI
  • Spain GDP, CPI
  • Italy PPI
  • Eurozone Economic Confidence, Consumer Confidence
  • Canada GDP

Views you can use

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Anatomy of a recession: Focusing on the Fed

In our latest “Talking Markets” podcast, Jeff Schulze, Investment Strategist at ClearBridge Investments and architect of their “Anatomy of a Recession” program, speaks about how the Federal Reserve’s latest moves are impacting the odds of a recession in the United States. Plus, what it would take for the Fed to reverse course and make a dovish pivot, and how much a recession is already baked into the markets. Read more:

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1. Indices are unmanaged and one cannot 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: Bank of America Global Fund Manager Survey, BofA Global Research.

3. Source: Bank of America Global Fund Manager Survey, BofA Global Research.

4. 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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