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

Equity markets proved resilient last week, and familiar themes dominated the narrative. A higher-than-expected European inflation print highlighted the challenges that the eurozone and European Central Bank (ECB) face. In the United States, some less-hawkish comments from Federal Reserve (Fed) officials offset hot macro data. In Asia, the main talking point was stronger-than-expected Chinese Purchasing Managers Index (PMI) data ahead of the China National People’s Congress (NPC), which started this weekend. Overall, markets recovered ground, with the MSCI World Index up 1.9%, the Stoxx Europe 600 Index up 1.4%, the S&P 500 Index up 1.9% and the MSCI Asia Pacific Index up 1.5%.1

Week in review

United States

US equity markets finished broadly higher last week, with a sharp bounce into the end of the week providing a boost despite the US 10-year Treasury yields hovering above 4% for most of the week. The S&P 500 Index closed up 1.9% and moved back above 4,000, whilst the Dow Jones Industrial Average was up 1.7% and the Nasdaq Index closed up 2.7%. US-focused equity funds saw their fourth consecutive weekly outflow, shedding another US$10.6 billion last week.2

Cyclical stocks outperformed, with materials leading the way. Defensives underperformed, with consumer staples and utilities finishing in the red overall.

Whilst hopes of economic growth buoyed the market, inflation continues to be a concern in the United States. The Institute for Supply Management (ISM) Manufacturing Index prices paid component came in stronger than expected at 51.3, and well up from 44.5 in the previous period. US two-year inflation expectations are now firmly above 3%. This led a risk-off move on Wednesday, as attention quickly shifted to the impact on interest rates. However, this trend reversed in the latter half of the week, as commentary from Fed officials seemed to temper market expectations on terminal rates.

St Louis Fed President James Bullard, historically one of the Fed’s most hawkish members, projected a terminal rate of 5.375%, just slightly below where the market is currently pricing.3 Also helping this narrative was the ISM Services prices paid component, which showed a slight moderation to 65.6 from 67.8 previously.

Some housing markets globally are showing signs of strain. This trend was evidenced further in the United States last week, with US mortgage applications to purchase homes at their lowest level since April 1995. In February, US house prices fell year-on-year for the first time since 2012. Also, mortgage rates jumped back above 7% last week to near 20-year highs.

Finally, after seasonality helped predict the US market selloff in the second half of February, it is worth noting that March and April are usually two strong months for S&P 500 Index performance.


European equities recovered into the end of last week to finish higher overall, led by cyclicals. The Stoxx Europe 600 Index closed the week up 1.4% and the Stoxx Europe 50 Index was up 2.5%. Markets in Europe are still proving incredibly resilient, despite the “higher for longer messaging” from the ECB and with German bond yields hitting new year-to-date highs.

Note, February was the sixth month in a row where the MSCI Europe Index has outperformed the MSCI USA Index. This trend will likely be watched in March, as there has never been seven consecutive months of such outperformance since the euro was created in 1999.

European Consumer Price Index (CPI) reports were a focus last week, coming in hotter-than- expected. German CPI came in at 9.3%, whilst the eurozone recorded 8.5% in February. Notably, core inflation continued to rise, increasing to 5.6% in February. That data dampened market spirits mid-week before a sharp recovery into the end of the week.

The European bond market saw some large increases in yields last week, with the German 10-year up by 17.7 basis points (bps), the French 10-year up by 18.2 bps, the UK 10-year up by 8.7 bps and Italian 10-year up by 9.0 bps.

In that context, we saw more hawkish talk from ECB President Christine Lagarde, who stated that rate hikes may need to continue, as inflation is not on a stable decline. She added that the ECB will do whatever is necessary to bring inflation back to 2%.

ECB minutes from the 2 February meeting showed limited “overtightening” concerns for now. The minutes noted that “concerns of overtightening are premature” at this stage, thereby downplaying the recent sharp rise in private sector borrowing costs and weakening in loan growth, calling these developments “a natural and desired consequence” of policy normalisation.

It was unsurprising to see ECB terminal rates rising sharply in recent weeks, OIS pricing indicates an expected peak rate of 3.90% in December, up from 3.75% in October last year.4

Sector performance divergence was large, with significant outperformance of cyclicals versus defensives. Basic resources finished the week higher as sentiment on China improved. The reopening story came back to life again following the latest Chinese PMI report, which was better than expected.

Note, the sector was down in February, erasing nearly all of January’s gains. Auto stocks were also strong amidst a strong earnings report from Volkswagen. At the other end, defensive stocks underperformed, with utilities and health care the worst performers on the week. Real estate stocks struggled too as central bank terminal rate expectations adjusted higher again last week.


Overall, last week was better in the Asia-Pacific region, with Hong Kong’s market one of the best performers, while Australia’s equity market lagged.

Hong Kong

Hong Kong’s equity market ended a four-week losing streak to close up 2.79% last week ahead of the upcoming NPC meeting, which started at the weekend. Sentiment improved on China’s economic data and property sales data, which showed stronger recovery. In terms of sectors, the tech sector performed well on the better economic outlook. The spotlight was on chip makers again after Vice Premier Liu He said China needs to implement up-to-date policy for the chip industry.

In other news, Hong Kong lifted its indoor and outdoor mask requirement, marking the end of all major COVID-19 restrictions in the city after almost three years.


China’s mainland equity market closed up 1.87% ahead of the NPC, which started at the weekend and is expected to continue for a further week. A key focus was some improving economic data, which helped the market. The official Manufacturing PMI came in at 52.6 versus the previous 50.1, and Non-Manufacturing was 56.3 versus the previous 54.4. Caixin Manufacturing came in at 51.6 versus the previous 49.2, and Services was 55.0 versus the previous 52.9 on the back of strong domestic activity.

New home sales at China’s top 100 developers rose 14.9% as demand recovered after the government lifted its zero-COVID policy and unveiled measures to bolster the property sector at the end of 2022. The real estate sector, which accounts for almost a quarter of China’s economy, has seen the first year-on-year growth since July 2021.

People’s Bank of China (PBOC) Governor Yi Gang signalled at a press briefing on Friday that it could cut the reserve requirement ratio for banks to support the economy. Yi Gang also said that China will keep the CNY exchange rate “basically stable” this year. In addition, the PBOC released its quarterly policy report in which the central bank affirmed its prudent policy stance to support economic growth and stability in 2023.

At the weekend, China’s NPC set a target of 5% gross domestic product (GDP) growth below the bottom end of market expectations. The statement from Premier Li Keqiang also dampened hopes for additional measures for the property sector when he said that steps should be taken to prevent “unregulated” expansion in the property sector.

The NPC also announced that it would raise defence spending by 7.2%, its fastest pace of increase in four years. It also vowed to strive for self-reliance in technology, focusing on areas like semiconductors as the United States increases sanctions against Chinese companies.


Japan’s Nikkei Index had a decent week, closing up 1.73% last week. Signs the economy was recovering, along with the hope of economic continuity from Bank of Japan (BoJ) Governor nominee Kazuo Ueda lifted investor sentiment. This week, he reiterated the need to maintain accommodative monetary policy and added that its merits—including improvements in corporate earnings and employment and an exit from deflation—outweigh the side effects on market functioning.

Japan’s easing of entry requirements for arrivals from mainland China was another positive for the market.

Elsewhere, Prime Minister Fumio Kishida has ordered the government to draft additional measures to counter price hikes and support Japan’s fragile post-COVID recovery.

The week ahead

To start the week, focus will be on headlines from the China’s NPC. Through the course of the week there are a number of macro data points to watch out for, but the February US employment report, out on Friday, will be the key focus. Before that we have Fed Chair Powell’s semi-annual testimony to Congress on Tuesday/Wednesday.

Monday 6 March    

  • Euro-area retail sales
  • US factory orders, US durable goods
  • China NPC 

Tuesday 7 March

  • German Factory Orders
  • United States: Wholesale Trade Sales/Inventories, Consumer Credit, US Federal Reserve Chair Jerome Powell presents his semi-annual Monetary Policy Report
  • China: Trade balance data
  • Australia: Reserve Bank of Australia decision

Wednesday 8 March

  • Germany: Industrial Production
  • Eurozone: Fourth-quarter GDP
  • Japan: Fourth-quarter GDP
  • United States: Trade Balance

Thursday 9 March    

  • United States: Initial Jobless/Continuing Claims
  • China: CPI/PPI

Friday 10 March

  • United Kingdom: Monthly GDP
  • Germany: CPI
  • Japan: BoJ monetary policy decisions
  • United States: February employment report

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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. “BofA Strategists See Cash Back in Vogue With Markets on Edge”. 3 March 2023.

3. Source: CNBC. “Fed’s James Bullard pushes for faster rate hikes, sees ‘good shot’ at beating inflation”. 22 February 2023.

4. Source: Bloomberg, as of 3 March 2023.

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