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

Last week was something of a non-event, with many investors taking a risk-off approach ahead of a slew of macro events this week. With that sense of trepidation amongst some investors, and after a strong fourth quarter (Q4) so far, we saw many markets pause for breath and the MSCI World Index fell 2.6%, the S&P 500 Index fell 3.4%, the STOXX Europe 600 Index fell 0.9%, but the MSCI Asia Pacific rose 0.7%.1

A week of catalysts

The week ahead has the potential to set the tone for markets into year-end and into the first quarter of 2023. Central bank meetings throughout the week include the Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SMB). In addition, key inflation data comes out in several countries, including the United States.

United States: Looking to the United States, Consumer Price Index (CPI) inflation data comes out on 13 December, with expectations for it to slow from 7.7% in October. Recall that the October data was 20 basis points (bps) lower than expected, but this was enough to prompt an aggressive squeeze in markets, with the S&P 500 Index up 5.5% on that day. This is also the last key data point prior to the Fed meeting, so the importance of it should not be underestimated.

On Wednesday, we have the Fed meeting and interest-rate decision. The market is pricing in a 50-bps rate hike to the existing rate range of 3.75%-4%. Given the rate hike seems like a done deal, focus will be on any commentary about the Fed’s “dot plot” forecasts and the future pace of any rate increases. The Fed’s median “dot” for 2023 was 4.625% at the September announcement, but the market expectations are now at around 5.125%. Looking further ahead, the market is now pricing 130 bps of cuts in 2024, so long-term guidance will also be a focus.2

Market sentiment has shown some signs of nerves ahead of this week, with the CNN Fear and Greed Index slipping back to “neutral” territory last week.3 Equity markets also saw some profit taking, and US Treasury yields tightened with some risk-off positioning evident.

Europe: The ECB policy meeting is on Thursday, and eurozone CPI data follows on Friday. The market is anticipating a 50-bps hike, but there is a chance of a curveball 75-bp hike. In addition, we are expecting the ECB to release a blueprint for quantitative tightening in its “key principles” document. It is expected that the document will remain high level, with key details and decisions being made in February ahead of a likely start to quantitative tightening in April.

The Swiss National Bank also holds its policy meeting and interest-rate decision Thursday. Markets anticipate the policy rate to rise to 1% from 0.5%—slowing from the 75-bps increase delivered in September.

United Kingdom: Similar to the United States, the United Kingdom’s CPI inflation data comes out the day before the BoE rate decision. Wednesday’s CPI data is estimated to decline from the higher-than-expected October reading of 11.1%. This will be the last data point for the BoE to consider ahead of its rate decision on Thursday. With that, the CPI print will be even more important. The UK employment data this week will be worth keeping an eye on.

The latest UK gross domestic product (GDP) data shows the economy grew 0.5% month over month in October, slightly higher than expected.4

Cold weather brings energy into focus

With much of Europe now in a prolonged cold snap, attention is on gas reserves and consumption. Until November, consumption had slumped sharply, but now that the cold weather is here, in the past week European reserves fell to 88% capacity (from 96% in November).5 This will be an important factor for watch for European assets.

European liquified natural gas (LNG) shipments are at an all-time high, which will help with capacity, although there are concerns around LNG supply as and when China reopens.

European gas futures have remained steady last week, up just 2.5%, suggesting markets are confident Europe can weather the storm.

Temperatures in the United Kingdom have plunged over the weekend, with a low of -15C° overnight. With the pressure this weather is putting on the energy network, prices have soared to all-time highs and National Grid has asked stand-by coal power plants to fire up to meet surging demand. A lack of wind is compounding the issue, with wind generating around 5% of Britain’s energy on Sunday, compared to 28.5% over the past year.6 The versatility of the UK power system will be a focus this week.

The week in review

United States

US equities traded broadly lower ahead of what is expected to be an eventful week for equity markets. The S&P 500 Index closed last week down 3.4%, the Nasdaq was down 3.6%, whilst the Russell 2000 Index underperformed, down 5.1%. All US sectors finished lower on the week, but the defensives outperformed, given the risk-off move, with utilities, health care and consumer staples, albeit all declined. The year-to-date outperformer, energy, was a notable laggard, on the week amidst an 11% drop in West Texas Intermediate (WTI) crude oil prices. There are fears the slowdown in growth will hit energy demand.

All eyes are on the Fed this week, and the stronger-than-expected November Producer Price Index (PPI) report last week did not help market sentiment. The report showed that prices rose 7.4% year-on-year, higher than anticipated. However, the heading reading did drop from October’s reading of 8.1%, which may give the Fed a further headache ahead of Wednesday’s interest-rate announcement.

US corporate earnings were also in focus last week, with a few concerning releases: Tesla reported slowdowns and production cuts at its Shanghai plant; Apple discussed weak demand trends; whilst Bank of America said the growth rate in spending is starting to slow, with investment bank revenue dropping.

Bond yields were in focus as well last week. The 10-year Treasury dipped below 3.45% on Wednesday and into Thursday before rallying back above 3.55% at the end of the week. The 10-year is now down 80 bps from October’s peak. The rally into the end of the week comes amidst growing concerns of the growth backdrop, leading to the risk-off move and a flight to safety. The US two-year Treasury followed a similar path last week, dipping below 4.25% late on Wednesday.


European equities finished a quiet week down 0.9%, ending their best consecutive weekly run since the first quarter of 2021. In Europe, the STOXX Europe 600 Index traded above its 200-day moving average and remains on track for its best Q4 since 1999.7 Despite the quarterly move, European equity funds have seen 43 consecutive weeks of outflows, shedding another US$300 million.8

It was a rather uninteresting week in terms of market moves. Insurance stocks outperformed last week, along with travel and leisure stocks, amidst China’s reopening and expected pent-up demand over Chinese New Year. In terms of the underperformers, oil and gas stocks traded lower last week given the drop in oil prices. The European Union/G7 price cap on Russian exports of US$60/barrel came into effect. Russian President Putin suggested the country may cut its output as part of their response to the price cap.

European equities continued their record run of outflows, as noted.


Overall, last week was another good one for equity markets in Asia, with Hong Kong the outperformer again as the China reopening headlines gained further traction.

Hong Kong’s benchmark equity index closed last week up 6.56%, with sentiment remaining upbeat as China relaxed COVID-19 restrictions with new guidelines issued on home quarantines. Meanwhile, authorities in Hong Kong announced that they would shorten the isolation period for people who tested positive and will require inbound travelers to take fewer rapid tests. Macau casino shares jumped, leading the advance in stocks tied to China’s reopening, after the local government said it will follow the mainland’s policy to gradually relax COVID-induced curbs.

Japan’s equity market closed last week up 0.4%, with the market worried whether the Fed will maintain policy tightening and whether it will it end up sending the global economy into recession. The yen weakened versus the US dollar last week on the continued divergence in the monetary policies of the Fed and the Bank of Japan (BoJ), with the former widely expected to hike interest rates again and the latter consistently asserting its commitment to an ultra-loose policy stance. On the macro front, we had some data last week that indicated that Japan’s economy contracted less than initially expected in the third quarter, with GDP shrinking an annualised 0.8%, less than the 1.2% consensus.

Equities in mainland China were higher last week, as Beijing’s rapid easing of COVID-19 pandemic restrictions bolstered investor sentiment, despite an expected surge in infections.

Chinese officials announced a 10-point guide to their new COVID-19 prevention and control measures. The new measures include home quarantine for people with mild symptoms, a vaccination programme for the elderly, and reducing mass testing requirements in many cities. Lockdowns in high-risk areas would be lifted if no new cases appeared for 5 consecutive days.

However, weaker trade data tempered optimism about reopening somewhat, as China’s exports fell 8.7% in November from a year earlier, which was the steepest monthly drop in exports since February 2020. Weaker global demand, resulting from rising prices, interest rates worldwide and pandemic-related disruptions in China, weighed on exports.

South Korea’s market underperformed, closing lower last week. The market was mainly focused on demand concerns, especially in China.

Looking ahead, the macro focus in Asia will be on China this week, where we have the much-anticipated Central Economic Work Conference starting on Thursday. In addition, we have China November Industrial Production data (Thursday); India November CPI (Monday); Japan December Jibun Bank Manufacturing Composite Purchasing Managers Index (PMI), and Service PMI (Friday); and interest-rate decisions on Thursday in Taiwan and the Philippines.

The week ahead

As discussed, no festive slowdown this week, with several macro catalysts scheduled. CPI data, and central bank meetings will keep investors on their toes throughout the week. In addition, Friday sees the last meaningful market liquidity event of the year with a number of index rebalances and options expiries scheduled.

Monday 12 December

  • UK Rightmove House Prices
  • UK Monthly GDP, Industrial & Manufacturing Production
  • Eurozone Bloomberg December Economic Survey
  • Germany Bloomberg December Economic Survey
  • France Bloomberg December Economic Survey
  • Italy Bloomberg December Economic Survey
  • Spain Bloomberg December Economic Survey
  • UK Bloomberg December Economic Survey
  • US Federal budget

Tuesday 13 December

  • France total payrolls
  • UK Claimant Count & ILO Unemployment Rate
  • Norway GDP
  • Germany CPI
  • Italy Industrial Production
  • Germany ZEW Survey Expectations
  • US NFIB Small Business Optimism
  • US CPI
  • Japan Tankan surveys

Wednesday 14 December

  • UK CPI & RPI
  • Sweden CPI
  • Spain CPI
  • Italy Unemployment Rate Quarterly
  • UK House Price Index
  • Eurozone Industrial Production
  • US FOMC statement
  • Japan Industrial Production

Thursday 15 December

  • Eurozone EU27 New Car Registrations
  • France CPI, Business & Manufacturing Confidence
  • Switzerland SNB Policy Rate
  • Italy General Government Debt
  • UK Bank of England Bank Rate
  • Eurozone ECB Main Refinancing Rate
  • US Jobless claims & Retail sales
  • US Industrial & Manufacturing production
  • US Business inventories
  • US Total net TIC flows
  • China Industrial Production, China Retail Sales

Friday 16 December

  • UK Retail sales Inc Auto Fuel
  • Sweden Unemployment Rate
  • France S&P Global Composite PMI
  • Germany S&P Global/BME Manufacturing PMI
  • Eurozone S&P Global Manufacturing PMI
  • UK S&P Global/CIPS UK Manufacturing PMI
  • Eurozone Trade Balance & CPI
  • Italy CPI EU Harmonised
  • US state employment

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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. 2023 and 2024 Eurodollar futures implied rate hikes.

3. 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.

4. Sources: Bloomberg, UK Office for National Statistics.

5. Sources: Financial Times, ICIS.

6. Source: Bloomberg.

7. Bloomberg, as of 9 December 2022.

8. Sources: BofA, EPFR Global.

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