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 finished higher last week, with a notable short squeeze accelerating the rally. The MSCI World Index closed the week up 1.3%, while regionally, the S&P closed the week up 1.6%, the STOXX Europe 600 Index was up 1.2%, whilst the MSCI Asia Pacific underperformed, closing down 1.2%.1It was a fairly significant week for central bank announcements. The Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) all raised interest rates as expected. However, it was the meeting commentary which garnered most attention, as investors sought reasons to be bullish.

CNN’s Fear and Greed Index moved into “Extreme Greed” territory last week, marking a notable shift in market sentiment from “Fear” just one month ago.2We also received a couple of key datapoints out of the United States on Friday, with the January employment report and Institute of Supply Management (ISM) Service data beating expectations significantly. In China, the Caixin Purchasing Management Index (PMI) manufacturing was disappointing, which garnered attention too.

Markets also had to contend with a big week for corporate earnings, with over 30% of the S&P 500 Index market capitalisation reporting results. According to EPFR data, equity funds saw US$16 billion of inflows, and European equities notched a third consecutive inflow, albeit just US$21 million.3

Dovish takeaways drive a short squeeze

The Fed raised interest rates 25 basis points (bps) on Wednesday, and the BoE and the ECB followed with 50 bps hikes on Thursday. The market prioritised the small, dovish takeaways from the otherwise hawkish announcements.

Starting with the Fed, the 25 bps rate hike was in line with market expectations and was unanimous amongst committee members. The meeting statement was taken as hawkish, suggesting the need for ongoing hikes. However, the key message from Fed Chair Jerome Powell’s press conference was that there was no desire to drive rates any higher than the Fed’s December’s “dot plot” forecast suggested, and that now there was reason to believe that a 25 bps hike in March could be the last. Powell also noted that “the disinflationary process has started,” which led the US dollar to its worst Fed announcement day since November 2020.

Powell said that the Fed would take cumulative tightening and lags into account, which solidified market expectations for rates to top out at 5% in March. Powell did not firmly push back against market expectations for rate cuts in 2023. The market is now anticipating an increased number of cuts, with more than 25 bps fully priced in for December 2023 and more than 50 bps of cuts vs. the peak priced in by January 2024.

The BoE raised rates by 50 bps on Thursday to 4%, with seven members of the Monetary Policy Committee (MPC) voting for 50 bps and two voting for no change. The statement noted that risks to inflation remain “skewed significantly to the upside” and that they are putting more stress on the “recent strength in the labour market and inflation data, and relatively less on the medium-term projections”. The main headline around the BoE announcement seemed to be the removal of the word “forceful” in relation to future rate hikes, making a smaller 25 bps hike at the March meeting a realistic possibility.

Whilst BoE Governor Bailey noted that prices may have “turned the corner” and that the MPC had already done a lot, he noted it was too early to declare victory. The main areas of concern were labour market tightness, wage growth and services inflation, so these are clearly the key datapoints to watch out for in the coming months.

Also on Thursday, the ECB raised rates 50 bps as expected, taking the deposit facility rate to 2.5%. The ECB also pre-announced a further 50 bps increase for March, in line with December’s guidance, but still an unusual step to pre-announce. The hawkish bar was set high ahead of the announcement and it seemed like the pre-announcement was taken as confirmation that the end of the hiking cycle was nigh. In her press conference, ECB President Christine Lagarde was reluctant to call a peak on inflation, with the main concern being around energy (no surprise there, given the precarious Ukraine/Russia position).

The credit market perceived the release and press conference as dovish, with bund yields falling and forward rates being revised down. Of course, the bank sector did not like this at all, with stocks reversing earlier gains. The ECB stated that after March it “will then evaluate the subsequent path of its monetary policy”. The market is now pricing in a terminal rate of 3.38% in July.

The announcements drove some fairly meaningful short covering in Europe and the United States. Some of the most-shorted stocks in Europe and the United States saw significant moves higher on Thursday. Also of note, data also showed that Thursday’s short squeeze in the United States and Europe was quite significant, and Thursday’s daily volume was large.

Debate still rages on where we go from here. January is typically considered a good predictor for stock market performance for the rest of the year—the so-called “January barometer”. Based on historical trends, the best scenario is when the S&P 500 is up for the first five sessions of the year and January more generally, which is the case for 2023—the S&P 500 Index closed up 6.18% in January.

The week in review


European equity markets finished higher last week, with the Europe STOXX 600 Index closing the week up 1.2%. The cyclical-led rotation we have seen in 2023 in Europe was evident once again. A basket of stocks comprising of last year’s losers was up 8% on Thursday alone. Autos outperformed last week amidst positive US earnings. Retail stocks continued their solid start to the new year, with short covering likely a driver and Thursday a standout day. Technology stocks were also better off last week, helped by the risk-on sentiment. On the flip side, oil and gas, basic resources, and  defensives stocks faltered.  In terms of other notable movers, European high leverage stocks built on their solid year-to-date performance.

In addition to the central-bank commentary and record short squeezes, it was also a big week for corporate earnings in Europe, with 179 companies in the STOXX Europe 600 Index reporting so far. Results have been mixed, but markets have been resilient.

Also of note, last week saw the International Monetary Fund (IMF) issue a gloomy assessment of the UK economy, suggesting the United Kingdom would be the only G7 economy to see a contraction in 2023. In the face of “a quite challenging environment” due to high energy prices, rising mortgage costs and increased taxes, the UK economy was predicted to contract 0.6%.4 In contrast, the IMF said the eurozone had been “surprisingly resilient.”

The BoE forecast a gross domestic product (GDP) decline of 0.5% this year and a further fall of 0.25% in 2024. This is a shallower recession than it predicted in November following the Liz Truss chaos, but still represents a challenging outlook. Interestingly, last week, the exporter-heavy FTSE 100 Index hit all-time highs again (in GBP-terms), as the US dollar rallied after a stronger-than-expected gain in US non-farm payrolls in January; however, in US dollar terms, the FTSE 100 Index remains a global underperformer.

United States

As discussed, Wednesday’s Fed meeting was the key focus for investors. US equities grinded higher, with the S&P 500 Index up 1.6%. It is worth noting gains were not broad-based, with mixed performance across markets. The tech sector surged higher, with the Nasdaq 100 Index up 3.3%, while the more cyclical Dow Industrial Index traded down 0.2%. With the recent bounce off its lows, the Nasdaq 100 index is now close to bull market territory (a 20% rally). For the S&P 500, keep in mind 4200 marks the next key resistance level. Sector performance also highlights a wide divergence in performance last week.

Growth sectors were strong performers, with communications services and technology stocks gaining. Meanwhile, energy traded lower and the rotation out of last year’s winners continued.

US-China relations were in focus last week, as an unmanned Chinese balloon flying over the United States created an awkward spat between the two countries. China claimed it was collecting meteorological data, but the United States stated it was a spy balloon and shot it down on Saturday. On the back of this incident, US Secretary of State Anthony Blinken cancelled a visit to China where he had been scheduled to meet President Xi Jinping.

Whilst the Fed meeting certainly garnered a lot of attention, there was also some important macro data for the market to digest. The January US employment report was released on Friday and caught investors off guard. The headline non-farm payroll jobs reading came in at 517,000 and sectors with strong growth included leisure and hospitality, business services and retail. Unemployment fell to 3.4%,  vs. 3.5% in the prior month.

Equity markets edged lower on Friday following the jobs data, as it potentially increases pressure on the Fed to remain hawkish. Looking at other data last week, the picture was largely positive, with little sign of recessionary pressures. In another sign of strength for the US labour market, JOLTS Job Openings came in higher than expected, increasing to 11 million in the last business day of December.

Finally, the Institute of Supply Management (ISM) Services data also saw a massive jump to 55.2 in January vs. 49.2 in December, with new orders much higher at 60.4 vs. 45.2 prior. Earlier in the week, the manufacturing ISM came in at 47.4 vs. 48.4 in December.


We saw a pause for breath across the region in general last week, with the MSCI Asia Pacific Index closing down 1.16% after a strong run. Of the main economies, Hong Kong’s market was the underperformer, down 4.53%, and Australia’s equity market was the outperformer, up 0.86%. Despite the small pullback last week, in the last couple of weeks the buying has been broad-based across the region. In the past week, Hong Kong  saw the highest inflows, followed by China, but Japan’s market saw some profit taking after the recent streak of buying. The Adani saga continues with, approximately US $118 billion wiped off Adani companies’ values.

Japanese equities closed the week up 0.46%, with the Fed announcement indicating the end of the tightening cycle was in sight, giving the market a boost. The market also focused on earnings forecasts and announcements.

The Bank of Japan (BoJ) reiterated its commitment to its loose monetary policy, with figures showing its JGB purchases reached a record high in January, as it continues to defend the 0.5% yield cap.

Elsewhere, eyes were on the annual wage review with the trade unions, with BoJ Governor Kuroda expecting significant wage rises on the back of improved economic conditions and a tighter labour market.

The market saw some solid macro data last week, with better-than-expected retails sales and industrial production numbers as post-pandemic conditions improve, whilst consumer confidence also improved in January.

Looking at sectors, shippers dominated the week, with electrical appliance and utilities stocks also higher. On the flip side, mining, oil and insurance stocks were underperformers.

Hong Kong’s equity market closed the week down 4.53%, mainly on the back of profit-taking.

Tech giants fell after news headlines reported US President Biden is mulling broad prohibitions on US investment in Chinese technology. Baidu outperformed on the back of plans to launch a ChatGPT-like AI chatbot in March 2023.

The auto sector traded mixed after the release of January sales numbers. Momentum faded due to a lack of electric vehicles (EV) subsidies, while more EV makers announcing price cuts.

Macau casino operators slumped, despite positive gross gaming revenues, on reports that the Regulatory Bureau is proposing a 5% gaming junket commission tax.

Mainland China’s market closed the first full week of trading lower following the New Year holidays as investors locked in gains from the recent strong run and some concerns were raised about the pace of the recovery.

Local and regional governments are making efforts to boost new home sales, including the reduction of mortgage rates for first-time buyers. But despite those efforts and expectations of a central bank interest rate cut, data out last week showed that new home sales plummeted 49% in January.

Some positive news came from the IMF, however, as it increased its growth forecasts for the Chinese economy. GDP growth is seen at 5.2% this year (previously 4.4%) and 4.5% for 2024.5

Data-wise, the China January manufacturing PMI was in line with expectations at 50.1; the non-manufacturing PMI beat expectations, coming in at 54.4, and the China January Caixin service PMI came in at 52.9 vs. 48.0 in the previous month.

Chips and computing stocks led the way after China’s President Xi stressed the need to accelerate the establishment of a new pattern of development with stronger steps to boost domestic demand, enhance self-reliance in science and technology and expand opening up.

Tourism and transportation stocks faced heavy profit taking pressure after Chinese tourism data was released.

Finally, the China Securities Regulatory Commission published its initial public offering (IPO) reform policy draft to seek public opinions, which drew market attention. The key change is to apply a registration-based IPO system for all A shares (previously only STAR and CHINEXT). Market investors did not like this change, as it will likely raise IPO prices and increase the number of IPOs.

Week ahead

Euro area key events

Tuesday 7 February:  Germany Industrial Production

Thursday 9 February: Germany HICP Inflation;  Riksbank Policy Rate Decision

Friday 10 February: UK GDP, China Consumer Price Index (CPI) and Producer Price Index (PPI)

Monday 6 February

  • Germany January CPI & Construction PMI; December Factory Orders
  • UK January Construction PMI
  • Eurozone December Retail Sales
  • ECB speak: Holzmann

Tuesday 7 February

  • Germany, Spain Dec Industrial Production
  • ECB speak: Schnabel
  • BoE speak: Pill
  • UK Chancellor Jeremy Hunt takes questions in the House of Commons

Wednesday 8 February

  • France fourth-quarter Private Sector Payrolls
  • Italy December Retail Sales
  • ECB Supervisory Board press conference
  • EU leaders summit
  • BoE speak: Bailey
  • US MBA Mortgage Applications & Dec Wholesale

Thursday 9 February

  • Riksbank Policy Meeting
  • US Jobless Claims

Friday 10 February

  • China Jan CPI & PPI
  • Italy, UK Dec IP
  • UK GDP
  • France fourth-quarter wages
  • ECB speak: De Cos
  • BOE speak: Pill
  • US February University of Michigan Sentiment

Views you can use

ECB hikes ratesone more to come? 

The European Central Bank hiked rates 50 basis points. Curious about what that means for investors? David Zahn, Head of European Fixed Income shares his thoughts. Read more. 

On My Mind: Fed to markets—keep dancing
Markets think the war against inflation has been won—and the Fed seems to believe it too—but has it? Franklin Templeton Fixed Income CIO Sonal Desai analyzes the latest data in light of the Federal Reserve policy meeting and examines whether a “painless landing” is possible. Read more. 

Quick Thoughts: The dangers of inertia
What does the concept of inertia have to do with portfolio allocations? Head of Franklin Templeton Institute Stephen Dover explains. Read more.

US budget season implications for the muni market
A slowdown in US economic activity this year is likely to impact most states, which could face budget deficits, according to Jennifer Johnston, Franklin Templeton Fixed Income’s Director of Municipal Bond Research. She outlines implications for the muni market. 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. 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.

3. Source: BofA Global Investment Strategy, EPFR.

4. Source: IMF World Economic Outlook, January 2023. There is no assurance that any estimate, forecast or projection will be realised.

5. Source: IMF World Economic Outlook, January 2023. There is no assurance that any estimate, forecast or projection will be realised.

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