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 were broadly higher again last week, continuing their strong start to the new year. The MSCI World Index closed the week up 3.2%, while regionally, the S&P 500 Index closed the week up 2.7%, the STOXX Europe 600 Index was up 1.8%, and the MSCI Asia Pacific Index closed up a notable 4.6%.1 The US December Consumer Price Index (CPI) print on Thursday was the focus for most of the week, with equity markets grinding higher into the release of the data and maintaining their strength on Friday. It was in line with market expectations, with a -0.1% headline reading and +0.3% core (excluding food and energy). Outside of the CPI data, the new corporate earnings season is coming into focus and so far, reports are not as bad as feared.

Meanwhile, gas prices in the European Union (EU) dropped 6.8% last week, which helps overall sentiment. Despite the equity market rally, in the latest Bank of America Merrill Lynch “Flow Show” report revealed that European equity funds lost another US$500 million last week, their 48th consecutive weekly outflow, with US equity funds shedding US$2.6 billion.2

Don’t fight the Fed Market?

There is still a lot of head-scratching going on with regards to market moves so far this year. Hedge funds have driven stocks higher at the start of the year and markets seem resilient, but short covering seems to be a significant factor.

There is still a lot of push and pull. No part of the market is now technically oversold, whilst the move in the CBOE VIX to below 20 was taken as a strong sell signal in 2022.3 The VIX hit 18.01 on Friday, a new 12-month low, whilst the European equivalent, the V2X, also hit a new 12-month low. The STOXX Europe 600 Index is trading nearly 6% above its 200-day moving average (a key technical level) and stocks were higher again vs. real yields (inverted) last week. Nevertheless, European stocks are still trading at a large valuation discount to US stocks, despite the performance in the fourth quarter of 2022.

The new market consensus for Federal Reserve (Fed) rate hikes is for 50 basis points (bps) to be added in the first half of 2023, followed by 200 bps of cuts over the following 18 months. The market expects a terminal rate of 4.9% in June 2023, which is not in line with what Fed officials have been saying.4 Last week, Atlanta Fed Bank President Raphael Bostic (a non-voter) reiterated that he favours getting the benchmark rate to between 5%-5.25% before reassessing what is required. San Francisco Fed Bank President Mary Daly (also a non-voter), said she expects the Federal Open Market Committee (FOMC) to raise rates above 5%, but doesn’t know yet what that terminal rate will be. Philadelphia Fed Bank President Patrick Harker (a voter) suggested there would be a series of rate hikes still to come, but that 25 bps hikes were more appropriate going forward. The market is fully pricing in a 25-bps hike at the start of February. Given the terminal rate expectations, we can infer that the market is expecting the Fed to make a dovish pivot in the next few months.

European Central Bank (ECB) and Bank of England (BoE) officials continue to hint at a further tightening in rates. ECB policymaker Robert Holzmann, a known hawk, said only a slowdown in core inflation can alter the ECB’s plans for raising interest rates. Isabel Schnabel, a member of the ECB Executive Board, was equally hawkish when she said that interest rates must still rise significantly, even as consumer price rises dipped back into the single digits for the first time since August 2022. This morning another member, Olli Rehn, said that he sees “significant rate hikes” at the next meetings.

Finally, Catherine Mann, member of the BoE’s Monetary Policy Committee and another known hawk, warned that the United Kingdom may need a “significant recession” if the central bank is to reach its 2% target.

It remains to be seen whether the market will eventually give in and follow the hawkish central bank tones, or whether the central banks will pivot to a more dovish stance than they have adopted until now. The market continues to take the commentary in stride, but many are still cautious (there still seems to be more bears than bulls in the market).

Gas prices were clearly a big driver of inflation through 2022, but they have now fallen 21% this year, and are now down 82% from their August peak. The upcoming earnings season will be very interesting and could set the tone for the first half of 2023. We would note that the  earnings forecasts for the STOXX Europe 600 Index have dropped fairly notably over the last few months.

Week in review


Last week was another positive one for European stocks, with the STOXX 600 Index closing up 1.8% and on track for its best January since 2015. Thursday’s US CPI print was the focus for most of the week. It seemed initially like the market didn’t really know how to react to it, with Thursday afternoon becoming fairly choppy. Outside of that, there were very few market catalysts through the week, meaning stocks continued the same course as the prior week. Thus, the rotation into last year’s losers continued, with cyclicals recovering ground vs. defensives. A basket of stocks consisting of the STOXX 600 Index’s 20 worst performers of 2022 is now up 20% year-to-date. Europe’s largest company, LVMH, also hit a new all-time high. More generally, European equities continue to outperform US equities, as they have done since November.

The German DAX Index continues to perform well, up 3.3% last week, as China reopening hopes helped sentiment. Meanwhile, the UK FTSE 100 Index continues to underperform so far this year, but was an outperformer last year, locking in a gain of nearly 1% in 2022 given its defensive nature and oil weighting.

Tech stocks continue to get a little respite, with the sector up last week, along with real estate stocks, amidst a pullback in interest rates. Travel and leisure and retail stocks were also higher last week. Health care was the only sector to finish the week lower in Europe,  given the risk-on move as investors rotate into more cyclical stocks. So far this year, it appears that luxury stocks are doing especially well, along with EU high leverage and tech.

In terms of macro data, the eurozone unemployment rate remained unchanged in November at a record low of 6.5%. Germany’s November industrial production reading came in slightly higher than expected at 0.2%. UK retailers enjoyed their best Christmas season since the start of the pandemic, with footfall rising 15% in December vs. a year before.5 Also, importantly in terms of growth, the UK monthly gross domestic product (GDP) unexpectedly grew 0.1% in November.

United States

Last week was another positive week for US equities, as the S&P 500 Index has seen its best start to the year since 2003, gaining 2.7% last week and 4.2% year-to-date. The picture was good across US markets, with the Nasdaq 100 Index up 4.5% and the Russell 2000 index 5.3% last week. The Nasdaq posted a sixth straight gain on Friday, which is its longest winning streak since November 2021.

With hopes rising that inflation has peaked and the Fed will pivot from its hawkish stance, stocks which suffered last year outperformed last week. The US 10-year Treasury yield slipped back to 3.5% as rate- hike expectations continue to fall; some Fed officials are guiding for a 25-bps hike in February, rather than 50 bps.

Looking at the S&P 500 Index chart, after bouncing off the 3800 level early in the month it has now pushed through its 200-day moving average and is testing resistance at 4000. This will be an important level for market technicians to keep an eye on this week.

In terms of sectors, consumer discretionary names outperformed last week, along with tech stocks. Defensives lagged in a “risk-on” environment, with consumer staples and pharmaceutical stocks both lower.

Fourth-quarter earnings season kicked off on Friday with a number of US banks reporting earnings. It was a largely positive outcome with financials stocks gaining ground.

As discussed, macro data was a key talking point with US CPI in line with expectations but markedly lower month-over-month and year-over-year. In addition, a University of Michigan report showed a fall in inflation expectations.

Whilst the BAML Bull & Bear Indicator remained in bearish territory last week, the CNN Fear and Greed Index swung firmly into “Greed” territory in recent weeks.6This suggests to us that US investor sentiment has improved sharply in 2023 given the hopes of falling inflation, potential easing of central bank tightening and improved chances of a soft landing.


Last week, all major Asian markets closed higher, with the MSCI APAC Index up 4.59%. The main macro catalyst was the US December CPI number.

Hong Kong’s equity market closed up3.56%, logging a third straight week of gains, as cooling US inflation fuelled risk appetite. Macau casino operators rallied, as Macau saw a surge in travellers after reopening. Autos gained on a slew of positive news: Beijing announced it will loosen car-plate restrictions for auto buyers and remove travel restrictions for electric vehicles; the China Association of Automobile Manufacturers (CAAM) said it sees the EV market share continuing to increase due to supporting policies; and BYD announced its expansion into the India market.

The oil sector advanced after China National Offshore Oil Corporation (CNOOC) lifted capex expenditure for 2023 to raise energy supply, as Beijing looks to raise production to safeguard energy security and fuel a rebound in economic growth.

Meanwhile, Japan’s equity market closed the week up a relatively subdued 0.56%, with investors perhaps more focused on the forthcoming Bank of Japan (BoJ) meeting on Tuesday/Wednesday of this week.

As core CPI in the Tokyo area rose 4% year-over-year in December—the fastest rate in 40 years—speculation grew that the BoJ could revise up its inflation forecasts and look at further monetary policy adjustments. The central bank surprisingly tweaked its yield curve control (YCC) framework in December. As a result, the BoJ was again forced to conduct unscheduled bond buying operations to keep the 10-year JGB yield around its new 0.50% cap, roughly the level at which it ended the week. While the revisions to the BoJ’s inflation forecasts are widely expected, further monetary policy changes may not be imminent until after the end of Governor Kuroda’s term in April.

Of 43 economists surveyed by the Bloomberg news agency, all but one predicted that the BoJ would leave its policy unchanged in January.7 Looking ahead, more than half of respondents saw a move towards policy normalisation by July.

Asked whether the BoJ needs to tweak its ultra-loose policy, PM Kishida said that monetary policymakers must have a view on the outlook for the economy, and there needs to be careful communication and dialogue with markets.

Looking at sectors, steel stocks were the best performers last week, followed by banks and mining. Agriculture, real estate and utilities were underperformers.

The Japanese yen strengthened against the US dollar last week.

China’s mainland equity market performed solidly last week,  up 1.19%. Again, the softer US CPI print helped, but earlier in the week, China issued a large quota for crude oil imports to prepare for an expected uptick in energy demand as infections start to wane and economic activity returns to normal.

The market anticipates more easing from Beijing shortly, e.g., RRR cut, LPR cut, property boost, etc., as Beijing is committed to revive the economy in 2023. Note: GDP growth targets will be announced at the National People’s Congress in March.

On the trade front, China’s exports fell 9.9% in December from a year ago, as global demand softened and rising infections disrupted activity after the government rolled back pandemic restrictions. Imports fell 7.5%. For the full year, China’s trade surplus reached an all-time high of $US878 billion, as strong export growth for most of 2022, and the rising price of goods boosted the value of exports.

In other economic news, China’s inflation rose 1.8% in December. Core inflation, which excludes food and energy prices, picked up slightly after remaining unchanged for three consecutive months.

Week ahead

Holidays: Monday 16 January: United States

Macro week ahead highlights

Europe may be starting the new year on a more optimistic note. We think data will likely confirm headline inflation has passed the peak in the euro area and the United Kingdom. Meanwhile, the German ZEW survey may indicate some of the gloom is dissipating as a warmer-than-normal winter eases the risk of a severe energy crunch.

  • Still, central banks will remain vigilant as underlying price pressures remain elevated. Minutes from the ECB’s meeting in December may provide clues about the size of future rate hikes.
  • The BoE will also closely monitor labour market data as the committee weighs whether recent signs that the labour market is cooling are enough to warrant a slower pace of hiking.

Euro-area key events

Tuesday 17 January:  UK Unemployment Rate; Germany ZEW Expectations Survey

Wednesday 18 January: UK CPI Inflation; Euro-area Final CPI Inflation

Thursday 19 January: ECB Monetary Policy Account

Friday 20 January UK Retail Sales

Global events calendar:

Monday 16 January

  • The World Economic Forum’s (WEF’s) annual meeting commences in Davos through Friday. This will be the first winter gathering of global leaders since before the pandemic. The WEF’s annual Global Risks Report showed the outlook for the next two years will be dominated by the threat of recession, the cost-of-living crisis and mounting debt distress.
  • January Eurozone Economic Survey
  • January Germany Economic Survey
  • January France Economic Survey
  • France Budget Balance year-to-date
  • January Spain Economic Survey
  • Italy General Government Debt
  • US Martin Luther King, Jr. holiday (market closed)

Tuesday 17 January

  • UK Labour Market Statistics
  • Germany ZEW Survey; Germany CPI
  • UK Claimant Count & ILO Unemployment Rate
  • Italy CPI
  • US Empire State manufacturing survey
  • BoJ meeting

Wednesday 18 January

  • UK CPI Inflation
  • Euro area Final CPI Inflation
  • Eurozone EU27 New Car Registrations
  • Italy Trade Balance Total
  • UK House Price Index
  • US Core PPI; US Manufacturing & Industrial production; US Business inventories

Thursday 19 January

  • ECB Monetary Policy Account
  • Switzerland Producer & Import Prices
  • Spain Trade Balance
  • UK Bank of England Bank Liabilities/Credit Conditions surveys
  • Italy Current Account Balance
  • US housing starts & building permits

Friday 20 January

  • UK Retail Sales
  • Germany Producer Price Index (PPI)
  • Spain house transactions
  • US existing home sales

Views you can use

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PODCAST Anatomy of a Recession: The long view for a new year
In our latest “Talking Markets” podcast, we meet with regular guest, Jeff Schulze of ClearBridge Investments, to discuss the US economy—focusing on inflation, the US labor market, and the Federal Reserve. Read more.

Opportunities in the growing field of ESG investing
A Franklin Templeton survey among Canadian investors revealed that while ESG themes are important, there is a general lack of knowledge and awareness of ESG or sustainable investing. Duane Green, President and Chief Executive Officer (CEO) of Franklin Templeton Canada, shares our survey findings as well as other global results and discusses potential opportunities for financial advisors in this growing field. Read more.

Emerging Markets Insights: Optimism on 2023 outlook
As we head further into 2023, our Franklin Templeton Emerging Markets Equity Team finds many reasons to be constructive about emerging markets. Read more.


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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: BofA Global Research, “Flow Show” 13 January 2023.

3. The CBOE Market Volatility Index measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Often called the “fear gauge”, lower readings suggest a perceived low-risk environment, while higher readings suggest a period of higher volatility. 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.

4. There is no assurance that any estimate, forecast or projection will be realised.

5. Source: Morningstar, “UK Christmas footfall in December strongest since pandemic”, 6 January 2023.

6. The Bank of America Bull & Bear Indicator is a measure of trader sentiment. 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.

7. Source: Bloomberg,” BOJ Watchers See Earlier Policy Shift After December’s Surprise”, 12 January 2023.

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