The digest
Global equities continued to recover ground last week, with almost all indices and sectors trading higher. The MSCI World Index closed up 6.7%, its biggest weekly gain since November 2020. Regionally, the S&P 500 Index was up 5.9%, the STOXX Europe 600 Index was up 3.7%, whilst the MSCI Asia Pacific bounced back after some recent underperformance, up 8.4%.1
Newsflow was very supportive for equity markets last week. The softer-than-expected US Consumer Price Index (CPI) print was the main headline-grabber, as hopes rose that tighter monetary policy conditions were bringing inflation under control. With that, rate-hike expectations fell globally, which in turn saw bond yields fall. Given bearish positioning, equities surged higher. Hopes of an easing in China’s COVID-19 policy also helped drive market moves last week. The US midterm election garnered a little market attention too—there is a strong correlation between a gridlocked Congress and positive market moves for the 12 months after mid-term elections. There was turmoil again in the crypto space following the bankruptcy of FTX.
Week in review
Europe
European equities were broadly higher last week, with the key drivers coming from outside the region. The STOXX Europe 600 Index was up 3.6%, its biggest weekly gain since mid-March. There were more positive headlines out of Ukraine. Russian forces were reportedly pulling back from the city of Kherson, despite the Kremlin’s claims that Kherson was still part of Russian territory. There were also reports that Russia and the United States will hold nuclear arms treaty talks in Cairo.
This morning it was reported that the European Union is “ready to go” with an effort to impose a price cap on Russian oil. European Commission President Ursula von der Leyen said: “It is important not only to dry out the war chest of Russia but also very important for many vulnerable countries to have an acceptable level of prices”.
Defence stocks struggled last week, with headlines suggesting a defence budget cut from the UK government not helping matters. Separately, oil and gas stocks suffered; year-to-date winners were sold and year-to-date underperformers rose last week, with some notable short covering aiding the rally. Growth stocks surged, with technology stocks strong outperformers last week. Retail, financial services and real estate stocks were also higher.
Despite the overall macro-driven strength last week, investors still need to focus on corporate earnings to see the effects flowing through. In Europe, 79% of the companies in the STOXX Europe 600 Index that were due to report earnings have now done so, and have beaten expectations across all four key metrics: sales surprise, sales growth, earnings surprise and earnings growth. No sector has been a notable best performer, although consumer discretionary stocks have been a clear underperformer, reflecting conditions in Europe’s cost-of-living crisis. Overall, earnings per share (EPS) growth has been higher than expected, with strength in energy stocks a big driver.
United States
US equities were higher across the board last week, with a softer-than-expected CPI print driving hopes of a Federal Reserve (Fed) pivot. The S&P 500 Index was up 5.9%, its biggest weekly gain since late June. The CPI print on Thursday saw an increase of 0.4% month-over-month, which was a smaller gain than expected. This meant the annualised rate faded to 7.7% vs. 8.2% previously. With inflation now seemingly on a downward trajectory, interest rate-hike expectations fell sharply last week, with the Fed now expected to take a more gradual approach to managing rates. Fed officials noted that rates are still going up, but the ascent would be less steep.
The market is now expecting a terminal rate of 4.93% in June next year, down from highs of 5.1%.2 Fed Chair Jerome Powell pointed to the jobs market as justification for the recently more hawkish tones; however, that picture seems to be changing, as last week there were large layoffs announced across the tech sector.
The US dollar sold off on the back of the CPI print, closing the week lower. Also, to add to the “bad news is good news” theme, the University of Michigan consumer sentiment reading fell to 54.7 in November, the lowest level since July.
The US midterm elections were also a focus last week. It was not the so-called “red wave” for the Republican party, which the market had expected. The Democrats kept their majority in the Senate after they kept control of seats in Nevada and Arizona, two key battleground states for the Republicans. History has shown that the incumbent party typically loses support at the midterms, so last week was viewed as a strong showing for the Democrats. As alluded to above, historically, the US stock market has gained in the 12 months after midterm elections.
In terms of US earnings, 91.4% of the S&P 500’s market cap has reported, and earnings overall have surpassed estimates. Value stocks have been delivering stronger revenue and EPS growth than growth stocks in the third quarter. EPS growth excluding energy was much softer, coming in lower year-over-year.
Asia
Equities in Asia were strong last week, with the MSCI Asia Pacific Index closing up 8.38%.
Hong Kong’s Hang Seng was the outperformer, closing the week up 7.21%, mainly due to a strong rally on Friday after China eased COVID-19 quarantine restrictions amid a series of other relaxing measures.
Chinese real estate developers logged huge gains after China expanded a key financing support program designed for private firms, including real estate companies. Short covering and improving sentiment following changes to its zero-COVID policy and supportive measures for the battered property sector sent the stocks rallying into the weekend. In addition, news that US President Joe Biden would be meeting with China’s President Xi Jinping helped risk sentiment. In a meeting expected to be held on Tuesday, the two presidents are likely to discuss issues including Taiwan, Ukraine and North Korea, and establish red lines between the two rivals.
Japan’s Nikkei Index closed the week up 3.91%. The Bank of Japan (BoJ) said it would retain its ultra-loose monetary policy to underpin the fragile economic recovery. The yield on the 10-year Japanese government bond fell to 0.23% from 0.25%, while the yen strengthened versus the US dollar. The BoJ suggested that its interventions in the currency markets had worked. .
After a late Friday rally, Mainland China’s Shanghai Composite Index closed the week up 0.54%, underperforming other markets in the region due to concerns about new signs of economic fragility and increasing COVID-19 cases. The number of daily cases moved above 10,000 for the first time in over a year, threatening further lockdowns and weighing on sentiment for much of the week.
Yet, a relaxation in China’s strict zero-COVID policy seemed to have aided a market rally on Friday. Reports had surfaced over the previous week that the government was preparing to ease travel restrictions and other measures following the recent reelection of President Xi Jinping. Although Chinese officials stated that the policy remained firmly in place, on Friday afternoon, the government announced reductions in the mandatory quarantine time for in-bound travelers as well as testing requirements.
Last week’s economic reports were limited but demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below expectations and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.
Week Ahead
The G20 summit in Bali will be a key focus for markets this week. Leaders will meet on Tuesday and Wednesday. Geopolitical tensions, the war in Ukraine and inflation levels are expected to be the hot topics at the summit. Outside of that, inflation prints in Europe throughout the week will be closely watched.
Monday 14 November
UK House Prices
Eurozone, German, France, Italy, Spain, UK Bloomberg Economic Survey
Eurozone Industrial Production
Tuesday 15 November
UK employment data
France CPI
Spain CPI
German ZEW Survey
Eurozone trade balance; employment; gross domestic product
Wednesday 16 November
UK CPI; RPI; Producer Price Index (PPI)
Italy CPI
Thursday 17 November
Eurozone car registrations
Italy trade balance
Eurozone CPI
Friday 18 November
UK Consumer Confidence; Retail Sales
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Views you can use
Quick thoughts: Midterms and markets
While a divided US government may look appealing, there are long-term risks amid resulting gridlock, according to Head of Franklin Templeton Institute Stephen Dover. Read his thoughts on the US midterm elections. Read more.
Quick thoughts: The search for hidden opportunities
What are the implications of strategic asset allocation, the dynamics of public and private credit, tech-driven megatrends, and more? Stephen Dover, head of Franklin Templeton Institute, provides some insights gathered from our investment experts. Read more.
On my mind: A different kind of pivot
Markets hoped for a dovish Federal Reserve “pivot,” but got a hawkish surprise instead. Brace for more volatility as the yield curve adjusts, warns Franklin Templeton Fixed Income CIO Sonal Desai. She sees the fixed income outlook as more constructive moving further forward in 2023. Read more.
Emerging markets in November: Latin America continues to shine
The acceleration of innovation in emerging markets provides reasons for confidence in emerging markets long term, according to our Franklin Templeton Emerging Markets Equity team. Read more.
Developments in China and impact on portfolios
The Franklin Templeton Emerging Markets Equity team offers some highlights of China’s 20th Congress and investment considerations. Read more.
__________
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, as of 14 November 2022. There is no assurance that any estimate, forecast or projection will be realized.