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

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.

United States

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.

Asia Pacific

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)

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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. 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.

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