Equities followed the path of least resistance on a quiet week to finish higher last week. The MSCI World Index closed the week up 1.7%, while regionally, the S&P 500 Index was up 1.5%, the Stoxx Europe 600 Index was up 1.7%, whilst the MSCI Asia Pacific Index was up 1.0%.1 There were very few themes last week, with most of the focus being on this week and the big datapoints that it brings ahead of the next Federal Reserve (Fed) meeting in December.
It was a holiday-shortened week in the United States, with stock markets closed on Thursday for Thanksgiving. Central bank action was fairly light last week; however, the People’s Bank of China (PBOC) cut the reserve requirement ratio by 25 basis points (bps) as expected on Friday in an effort to maintain ample liquidity.
Commodity prices were in focus last week as European gas prices rose again with temperatures set to plummet across central Europe in the next 2-3 weeks. Also, crude oil prices fell, with headlines around potential price caps causing some volatility. Europe-focused equity funds recorded their 40th consecutive week of outflows, shedding another US$2.3 billion, according to Bank of America data. This now represents the longest ever streak of outflows for Europe-focused funds, with US$75 billion and US$28 billion shed from active and passive funds respectively.2
Time to take stock ahead of 2023
This year has been a bit of a bloodbath for investors, apart from those who are weighted towards energy. In 2022, there has been a US$33 trillion global equity market collapse as inflation hit 40-year highs. Global government bonds are down 22%, their worst year since 1949. This is leading many investors to chase performance into year-end.
Last week, the European Stoxx 600 Index recorded its sixth consecutive weekly gain, its longest winning streak for a year. Seasonality and a quiet market should mean the path of least resistance is upwards. However, inflation—and central bank action to combat it—remains the key driver of markets at the moment, and we are edging closer to the next Fed policy meeting and interest-rate decision on 14 December. This week, markets will focus on the Personal Consumption Expenditure Price Index (PCE) reading out on Thursday, which is the Fed’s favoured view on inflation and should be critical ahead of the rate decision two weeks later. The US November employment report should capture market attention on Friday.
Hawkish central bank rhetoric appeared to ease again last week. The Swedish Riksbank raised rates by 75 bps to 2.5% as expected; however, it did indicate a peak rate of 2.84% next year, lower than the market had been pricing in. European Central Bank (ECB) members also spoke of easing the pace of rate hikes. Rhetoric was also dovish in the United States. The market is currently pricing in a US rate hike of 53 bps in December.
Week in review
European equities were on a slow march higher through a quiet week, finishing up 1.7% last week. The STOXX Europe 600 Index is now up 13.6% in the fourth quarter and is trading 3% above its 200-day moving average. Limited central bank activity and a US market holiday on Thursday meant that market catalysts and volumes were muted.
Inflation remains the driving theme in Europe. Germany’s October Producer Price Index (PPI) reading surprised to the downside on Monday, with a year-over-year (Y/Y) rate of 34.5%. That led to lower bond yields; the 10-year bund very briefly dipped below 1.8% on Thursday. Volatility fell again, with the V2TX sub-20 for the first time since January.3Interestingly, so far this year, whenever market volatility has fallen to these levels, a market selloff has then followed.
Sector performance divergence was quite tight last week. Media stocks, travel and leisure and basic resources were all higher, the latter helped by the move in the US dollar. Autos were the worst sector in Europe last week following a couple of bearish headlines through the week.
Last week, some banks were keen to stress the forecasted drop in temperatures across central Europe in the next 2-3 weeks. The weather seems to be cooling down following an unusually mild period which allowed governments across mainland Europe to fill gas reserves. Of late, lower natural gas prices have coincided with a large European factor rotation (out of European defensives and into cyclicals). The latest data suggests that temperatures in Germany are set to hit -10°C around 10 December. These temperatures could hit as early as next week in the United Kingdom. Gas inventories are likely to see withdrawals in the coming weeks, and there is an impact on European natural gas prices and a knock-on effect for inflation reports and rate expectations.
As expected, last week was a quiet week in terms of newsflow and market activity given the Thanksgiving holiday. The path of least resistance was higher, and the S&P 500 Index ended the week up 1.5%, with other equity indices also in positive territory. The S&P 500 Index moved above 4,000, and its 200-day moving average of 4,056 could be a resistance level to keep an eye on into year-end.
The minutes from the last Fed meeting were released on Wednesday and concluded it will “soon be appropriate” to reduce the pace of rate increases. According to the minutes, a “substantial majority” of Fed officials support slowing the pace of rate rises soon. It noted that a “slower pace in these circumstances would better allow the committee to assess progress towards its goal.”
There were a couple of Fed speakers last week. San Francisco Fed Bank President Mary Daly noted the Federal Open Market Committee (FOMC) will be mindful of impact lags as it continues higher. Also, Fed Bank of Cleveland President Loretta Mester said the Fed can ease the pace of tightening next month as officials assess the impact of previous moves.
The market sees a rate hike of ~50 bps at the next Fed meeting on 14 December. Looking further out, the market is pricing a terminal interest rate of around 5.1% (current range is 3.75%–4%).
In the commodity space, West Texas Intermediate (WTI) crude oil fell 4.8% on an expected fall in demand, with the European Union trying and failing to put a price cap on Russian energy. However, the sector is still the best performer year-to-date, up some 65%. It is worth noting a breakdown in correlation between WTI crude oil and US energy sector. The last time crude oil was down 25% from a 52-week high and the energy sector was still within 3% of a 52-week high was in 2006.
Looking to macro data, the US Purchasing Managers Index (PMI) data saw a composite reading at 46.3. The University of Michigan Sentiment improved to 56.8 versus 54.7 previously, with the important one-year inflation expectations falling to 4.9% versus 5.1%. US October new home sales were up 7.5%, higher than anticipated.
Last week was mixed in Asia, with Japan’s equity benchmark up 1.37% but Hong Kong’s down -2.33%, and the wider MSCI Asia Pacific Index finishing up 1% on the week.
Japan’s market was the main outperformer on the (holiday shortened) week, amid optimism that lower-than-estimated inflation could tame rate hikes. Utilities, insurers and banks led the way higher, while energy names were weaker. Inflationary pressures showed signs of broadening in November amid a surge in Tokyo core consumer prices. PMI data showed the first contraction in Japan’s manufacturing sector since Jan 2021, while a recovery in the tourism industry continued to support the services sector, which nevertheless stagnated.
On the flip side, Hong Kong’s market had a poor week, mainly on concerns that a surge in COVID-19 infections (to an all-time high) in mainland China will trigger more lockdowns and sour the outlook for corporate earnings. Chinese real estate developers extended last week’s rally. Following the “16 measures” issued last week, several policies have been rolled out.
China’s mainland market closed the week with small gains as COVID-19 concerns weigh on sentiment. China’s National Health Commission urged sticking with the zero-COVID policy and said the outbreaks remain “severe and complex.” More large cities including Beijing, Shanghai and Zhenzhou are facing some sort of mobility restrictions. China reported over 40,000 new cases on Sunday, and lockdowns have triggered civil unrest in multiple cities.
The State Council meeting signalled that more monetary policy stimulus is coming, including a reserve requirement ratio cut, probably within days. PBOC monetary committee members said China will have larger room for monetary policy in the second half of 2023 if the Fed slows down its interest rate hikes at that time.
Elsewhere, Malaysia’s market closed up 2.6% last week as Pakatan Harapan’s (PH) leader, Anwar Ibrahim, was sworn in as Malaysia’s 10th prime minister. Anwar’s appointment follows a period of more than two decades in opposition.
Macro week ahead highlights
This week, the US PCE inflation data is out on Thursday and the November US employment report is out on Friday. These could be key for shaping, or confirming, interest-rate expectations ahead of the next Fed meeting in a couple of weeks. Note, this week straddles month-end, so we anticipate a large MSCI rebalance on Wednesday.
Monday 28 November
- Eurozone M3 money supply
- UK CBI retailing reported sales
- Japan retail sales, Jobless rate
- US Dallas Fed manufacturing survey
Tuesday 29 November
- Spain HICP inflation
- Germany HICP inflation
- UK consumer credit/UK mortgage approvals
- Italy industrial sales and Producer Price Index (PPI)
- Eurozone Industrial and Consumer Confidence
- Japan Industrial Production
Wednesday 30 November
- UK Nationwide House Price Survey
- France HICP inflation
- Italy HICP inflation/gross domestic product (GDP)
- Euro-area CPI inflation estimate
- Spain Retail sales
- Germany unemployment change
- US ADP employment/GDP
- China PMI data
Thursday 1 December
- UK Decision-Maker Panel Survey
- Spain S&P Global Spain Manufacturing PMI
- Italy S&P Global Italy Manufacturing PMI/Unemployment Rate/New Car Registrations
- France S&P Global France Manufacturing PMI
- Germany S&P Global/BME Germany Manufacturing PMI
- Eurozone S&P Global Eurozone Manufacturing PMI/unemployment rate
- US Jobless claims and personal income/construction spending
- US PCE Index for October
Friday 2 December
- Germany trade balance
- France budget balance year to date
- Spain unemployment change
- Norway unemployment rate
- Eurozone PPI
- US October employment report (nonfarm payrolls and unemployment rate)
Views you can use
Franklin Mutual Series believes dividend payers can give value investors better total returns over the longer term. Read more.
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).
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.
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. Sources: BofA Global Research, EPFR Global.
3. The Euro Stoxx 50 Volatility Index (V2TX) measures implied volatility of near term EuroStoxx 50 options, which are traded on the Eurex exchange. 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 performance.