The digest
Global equities managed to finish higher overall last week, but the picture was quite mixed beneath the headline numbers. The MSCI World Index closed the week up 0.4%.1 The UK Consumer Price Index (CPI) report was the key positive headline last week, as inflation slowed sharply. There were other signs of disinflation too, implying that central bank hawkishness could be at its peak. Chinese macro data was also a focus for markets, with second-quarter gross domestic product (GDP) growing at a slower rate. This weighed on stocks in Asia and certain pockets of the European stock market.
Second-quarter earnings season moved into top gear last week, with a very mixed picture developing. Investment flows were on the bearish side last week, with money market funds seeing positive inflow, of US$7.5 billion.2 In terms of equity funds, US-focused funds saw outflows resume last week, losing US$2.3 billion, whilst European-focused equity funds posted their 19th consecutive weekly outflow, shedding US$1.6 billion.3
Week in review
Europe
European equities were mixed last week, with a clear rotation at play. Overall, the Stoxx Europe 600 Index closed the week up 1.0%.4 Year-to-date outperformers were hit, whilst the year’s laggards bounced. The UK CPI report was a clear focus for markets, surprising to the downside. In terms of technicals, indicators at the European index level are not yet in overbought territory, so there is still some potential upside for European markets.
In terms of sectors, real estate stocks outperformed on the back of the softer UK CPI print on Wednesday and the subsequent move in yields. Health care stocks also performed well last week, rising after Novartis announced a large buyback and amidst reports of a tornado damaging a Pfizer manufacturing plant in the United States. The readthrough is that European suppliers would be able to cover for any Pfizer supply shortfall. Energy stocks were also higher as oil prices rose. In terms of the laggards, tech stocks struggled last week as earnings weighed on stocks, and there was a general rotation out of the year-to-date winners. Basic resources struggled again last week, and the sector’s year-to-date underperformance comes on the back of a stronger 2022, when it was the second-best performing sector in Europe. Ongoing recessionary concerns and concerns around a slowing Chinese economy continue to weigh on sentiment.
On the data front, the July Eurozone Manufacturing Purchasing Managers Index (PMI) came in at 42.7, versus 43.4 prior. New Orders fell to 38.8 vs 40.1 in June. This miss brings back recession risks and will taper hawkish ECB expectations. German manufacturing PMI came in at its worst level since May 2020. UK PMIs also missed expectations, with Services coming in at 51.5 and Manufacturing at 45.0.
Spain’s general election results were just released, and Pedro Sanchez’s PSOE Party won 122 seats, against both the People’s Party (136) and Vox (33), holding 169 seats between them. This total is lower than the required 176 seats to form a majority coalition. Sanchez will remain prime minister, as there is no majority to remove him, which leaves Spain with the option of holding another general election. This is a negative outcome for Spanish equities, as it leaves an element of political uncertainty. Spain’s IBEX Index declined on the news.
UK inflation falls more than expected
On Wednesday, the latest inflation data out of the United Kingdom provided a real shot in the arm for UK equities, as both June headline and core CPI figures came in lower than expected. The headline number for June came in at +7.3%, compared to a May reading of +7.9%. core CPI was +6.9%.5 With that, the exporter-heavy FTSE 100 Index rallied last week, closing up 3.1%. The more domestically focused FTSE 250 was also higher, up 3.4% on the week.
UK housebuilders had their best day of the year so far on Wednesday and up 10% on the week. UK equities have lagged their European peers year-to-date, so it was no surprise to see them stronger on the back of a positive headline. Note, year-to-date the FTSE 100 Index is up 2.8%, the Stoxx Europe 600 Index is up 8.5%, France’s CAC40 Index is up 14.8%, and Germany’s DAX Index up 16.2%. This has led many to question whether it’s now the right time to buy UK stocks, which look like one of the cheapest asset classes in the world.
United States
US equities finished higher overall last week, with much of the focus on the latest round of earnings reports. The S&P 500 Index closed the week up 0.7%, whilst the Russell 2000 Index closed up 1.5%. The Dow Jones Industrial Average was up 2.1% on the week and recorded its 10th straight session of gains on Friday, its longest winning streak since August 2017.6 However, the tech-heavy Nasdaq Index finished the week lower, down 0.9%. With few macro drivers last week, investors were looking at market technical conditions, with talk of overbought conditions and stretched sentiment indicators. There was no Fedspeak last week with the Federal Open Market Committee (FOMC) in its latest blackout period ahead of this week’s policy meeting. The market is widely expecting a 25 basis-point rate hike this week; however, the question remains on the path thereafter. As it stands, the market expects the Fed to hold the new level through until March next year, when the beginning of a rate cut cycle is anticipated.
In terms of sectors, energy stocks rose with oil prices. Health care stocks closed the week up 3.5% despite reports of medicine supply disruptions following tornado damage at a Pfizer plant in North Carolina. Communication services stocks were the notable laggard in the United States Consumer discretionary stocks, among the year-to-date outperformers, declined amidst rising concerns consumers are getting squeezed more and more.
Asia
It was a shortened week for trading in Japan, with the market closed last Monday for Marine Day.
Performance-wise, it was a mixed week, with the Nikkei closing the week down 0.27%.
Last week was a somewhat cautious one with all eyes on this week’s Bank of Japan (BoJ) meeting. There is market chatter that the BoJ might tweak its yield curve control (YCC) policy. Inflation remains well above the BoJ’s 2% target; the June core inflation rate accelerated from 3.2% to 3.3%. Despite this, press reports on Friday suggested that policymakers are likely to keep their easy monetary stance at the upcoming meeting. The BoJ is also expected to update its inflation projections this week, and that could provide insight into the likely direction of policy. On the back of this, the Japanese yen weakened and bonds sold off.
Amongst sectors, semiconductor-related stocks declined after TSMC cut its revenue forecast. Earnings season is underway, with a number of key tech companies reporting last week.
Last week was poor for Chinese securities, with the Shanghai Composite Index closing the week down 2.16%, as weaker economic data impacted sentiment.
China’s year-over-year second-quarter GDP came in at 6.3% (vs. 4.5% in the first quarter), and youth unemployment jumped to a record 21.3%. In response, the government pledged to improve conditions for private businesses to boost corporate confidence and release an 11-point plan to boost household spending.
Monetary policy-wise, the People’s Bank of China kept its one-year medium-term lending facility rate at 2.65% (after its 10 basis-point [bp] cut in June), in line with expectations.
Sector-wise, property and construction stocks were the outperformers last week, as China appears to be mulling mortgage easing to spur home buying in big cities. Agriculture stocks also gained ground as India curbed rice exports and President Xi Jinping stressed the importance of food security. On the flip side, telecommunications stocks and information technology stocks declined.
Looking ahead, it will be a relatively light macro week in China, with industrial profits and official PMI data expected to be reported.
The market continues to await stimulus measures from the government as the economy faces disinflationary pressures and a continued economic slowdown. The Politburo meeting this week could announce some stimulus measures to revive spending and the property sector.
Stocks in Hong Kong failed to extend last week’s rally, closing the week lower despite China’s roll-out of more supportive policies to boost the private economy.
Chinese developers were under pressure, and China’s home prices dropped for the first time this year in June after five months of stabilization. Stocks in the auto sector traded mixed, after China’s National Development and Reform Commission announced measures to promote auto and electronics consumption. Hardware names plunged.
Tropical Cyclone Doksuri—which is expected to escalate into a Super Typhoon—may disrupt market activity in Hong Kong. The storm is currently expected to head towards Taiwan, but any movement Southwards could result in the closure of markets in Hong Kong.
Week ahead
Macro week ahead highlights
The Federal Reserve (Fed) and European Central Bank (ECB) take centre stage this week, with both banks expected to hike interest rates by 25 bps. The market then expects the next action from the Fed to be a cut of 25 bps in March of next year. The ECB is expected to hike by another 25 bps in September; however, the question is whether the latest PMI reports will cause the ECB to rethink and try to avoid a harder landing.
Eurozone key events:
Sunday 23 July: Spain National Election
Monday 24 July: Euro-area Flash Composite PMI; UK Flash Composite PMI
Tuesday 25 July: Germany Ifo Expectations Survey; Euro-area Bank Lending Survey
Wednesday 26 July: FOMC meeting and interest rate decision; Euro-area M3 Money Supply
Thursday 27 July: ECB meeting: main refinancing rate and ECB Deposit Facility rate decisions
Friday 28 July: France GDP; France HICP Inflation; Spain GDP; Spain HICP Inflation; Germany HICP Inflation
Monday 24 July
- UK: S&P Global/CIPS UK Manufacturing/Services/Composite PMI (July)
- Euro area: EMU: HCOB Eurozone Manufacturing/Composite/Services PMI (July)
- France: HCOB France Composite/Manufacturing/Services PMI (July)
- Germany: HCOB Germany Manufacturing/Services/Composite PMI (July), Import Price Index (June)
- US: Chicago Fed Nat Activity Index (June), S&P Global US Manufacturing/Services/Composite PMI (July)
Tuesday 25 July
- Germany: IFO Business Climate/Current Assessment/Expectations (July)
- United States: Philadelphia Fed Non-Manufacturing Activity (Jul), FHFA House Price Index (May), S&P CoreLogic CS 20-City SA/HPI NSA (May), Conf. Board Consumer Confidence/Present Situation/Expectation (Jul), Richmond Fed Manufact. Index/Business Conditions (July)
Wednesday 26 July
- Euro area: EMU: M3 Money Supply (June)
- France: Consumer Confidence (July)
- United States: MBA Mortgage Applications (July), New Home Sales (June), FOMC Rate Decision (Upper Bound)/(Lower Bound) (July), Interest on Reserve Balances Rate (July)
Thursday 27 July
- Euro area: EMU: ECB Main Refinancing/Deposit Facility Rate/Marginal Lending Facility (July)
- Germany: GfK Consumer Confidence (August), Retail Sales (June)
- Italy: Consumer/Manufacturing Confidence Index (July), Economic Sentiment (July), Hourly Wages (June)
- United States: Wholesale/Retail Inventories (Jun), Durable Goods Orders/ Cap Goods Orders Nondef/Ship Ex Air (June), GDP Annualized/Price Index (second quarter), Durables Ex- Transportation (June), Personal Consumption (second quarter), Core PCE (second quarter), Initial Jobless/Continuing Claims (July), Advance Goods Trade Balance (June), Pending Home Sales (Jun), Kansas City Fed Manf. Activity (July)
Friday 28 July
- UK: Nationwide House PX/NSA (Jul)
- Euro area: EMU: Consumer/Economic/industrial/Services Confidence (July), ECB Survey of Professional Forecasters
- France: GDP (second quarter), CPI/EU Harmonized (July), PPI (June)
- Germany: CPI North Rhine Westphalia/Hesse/Bavaria/Brandenburg/Saxony/EU Harmonized/Baden Wuerttemberg (July)
- Italy: PPI (June), Industrial Sales WDA (May)
- United States: Employment Cost Index (second quarter), Personal Income/Spending (Jun), PCE Core/Deflator (Jun), University of Michigan Sentiment/Current Conditions/Expectations/1 Yr/5-10 Yr Inflation (July), Kansas City Fed Services Activity (July)
- BoJ policy meeting
Views you can use
Quick Thoughts: The sovereign debt wave—an existential threat
The Sovereign Debt Wave is at a historic peak and appears set to continue growing. With higher inflation and reduced liquidity, some countries will be able to continue to issue debt easily, while some will not. Franklin Templeton Institute’s Stephen Dover and Kim Catechis discuss the different factors that will affect long-term investment returns for sovereign debt. Read more.
Cautiously optimistic on commodities
While caution in some areas of the commodities space may be prudent, there are also reasons for optimism, according to Fred Fromm, portfolio manager, Franklin Equity Group. He offers his mid-year outlook and potential investment opportunities. Read more.
India—prepared for takeoff
In addition to increasing demand for air travel due to a rapidly growing population, other positive trends are setting the stage for India’s economy and markets to take off. Franklin Templeton’s Head of Global Index Portfolio Management, Dina Ting, discusses the country’s supportive government programs as well as its market’s strong financial, IT and energy sectors. Read more.
Navigating inflationary seas—a study of central banks in the United States, Europe and Asia
With inflation still front and center and tight labor markets, how will central banks react to the challenging market environment? Join the Franklin Templeton Fixed Income (FTFI) economists as they discuss their views on central banks’ strategies and formalized policies in the latest installment of the FTFI Fifteen—a video series designed to cover relative market topics in about 15 minutes. Read more.
Technology advancements driving opportunities in health care
Health care’s innovation-driven growth and inherent resilience makes it a natural fit for dividend growth investors, according to Franklin Equity Group. Read more.
Dimensions & Insights: How to drive innovation and growth from everywhere
Diversity, equity, and inclusion (DEI) practices drive growth and groundbreaking innovation. As business change accelerates, deploying intentional DEI actions develops diverse thinking and new ideas that can break new ground and build business resiliency. Chief Diversity Officer Regina Curry recently discussed these topics with Frans Johansson, CEO of The Medici Group, author of The Medici Effect, and entrepreneur; and Franklin Templeton Head of Digital Assets Roger Bayston. They believe diverse and intentional inclusion practices increase the capabilities of participants, communities, networks, and teams to solve ever-changing problems. Read more.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
________
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 guarantee of future results.
2. Source: Bloomberg. “Tech Rush Continues Despite Nasdaq Rebalancing, BofA Says,” 21 July 2023.
3. Ibid.
4. 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.
5. Source: Bloomberg, as of 24 July 2023. There is no assurance any estimate, forecast or projection will be realized.
6. 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.