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 Investments 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 another tricky one for global equity markets, with most indices lower in a backdrop of elevated bond yields, geopolitical uncertainty, and noise around third-quarter earnings. In that context, investor sentiment was brittle, with the CNN Fear & Greed Index slipping back into “Extreme Fear” territory.1 There were some brighter spots in Asia though, with hopes of further Chinese stimulus. On the week, the MSCI World Index declined 4.2%; the S&P 500 Index declined 2.5%; the MSCI Asia Pacific declined 0.5%; and the STOXX Europe 600 Index declined 1%.2

Central banks in focus

It looks like an interesting week ahead for central banks, with the Bank of Japan (BoJ) policy meeting on Tuesday, the Federal Reserve (Fed) on Wednesday and the Bank of England (BoE) on Thursday, all with interest-rate decisions.

European Central Bank (ECB) at peak rates?

Last week the ECB kept interest rates on hold (deposit rate at 4%, main refinancing rate 4.5%), ending a run of 10 consecutive rate hikes. This was in line with expectations, and the decision was unanimous. However, there was no discussion from the ECB around when rates may be cut, with President Christine Lagarde saying it was “totally, totally premature” to discuss potential cuts.

In addition, the policy statement said inflation is “expected to stay too high for too long” and “domestic price pressures remain strong”. That said, she did note the impact of higher rates was “broadening” and following the latest ECB data, the central bank noted that “the economy is likely to remain weak for the remainder of the year”.

We saw evidence of this weakness last week, with the Eurozone Composite Purchasing Managers Index (PMI) easing to 46.5, the lowest in at least 35 months.

In this context, the market now sees the ECB rate at its peak point (“terminal rate”).3

BoJ: This meeting could strongly impact markets this week, given that there could be an adjustment to the BoJ’s yield curve control (YCC) policy. From the commentary we have seen, economists currently expect the BoJ to keep YCC in place, holding its short-term rate at -0.1% and the target for the 10-year Japanese government bond yield at 0% with an effective 1% ceiling. However, there was another hot inflationary print from Japan last week, with Tokyo’s Consumer Price Index (CPI) coming in at 3.3%, which was stronger than expected. In addition, Japan’s two-year bond note auction saw its lowest bid-to-cover ratio since 2010, which may suggest that investors are anticipating adjustments to BoJ policy.

Fed: Economic data for last week pointed to a strong US economy; however, the Fed is still expected to keep rates on hold this week. US third-quarter gross domestic product (GDP) growth came in at 4.9% year-over-year, the fastest pace in two years. Consumer spending drove the strong reading, as the personal consumption index rose in the third quarter. Government spending was also up, leading some to question how far the US consumer and the government can go to propel economic growth higher.

In other data, Durable Goods Orders were strong in September, coming in at 4.7%. With that, attention now turns to this week’s Fed meeting and interest-rate decision. The market is pricing in literally no chance of a hike at this meeting, meaning a second consecutive hold for the Federal Open Market Committee. Yet, the committee is expected to maintain its hawkish rhetoric, consistent with expectations for a further rate hike, as detailed in September’s “dot plot” of Fed projections.

BoE: The market expects the BoE to keep rates on hold at 5.25%, as it did last month. That said, last month’s decision was close, so it’s worth keeping an eye on this decision, too. Given inflation is still well above the BoE’s 2% target, even if rates stay on hold, it’s likely the central bank will still maintain its more hawkish “higher for longer” tone.

Week in review

United States

US equities closed last week broadly lower, with third-quarter earnings dominating the headlines. The major indices all had similar moves, with the S&P 500 down 2.5%, the Dow Jones Industrial Average down 2.1%, the Nasdaq Index down 2.6%, and the small-cap Russell 2000 Index down 2.6%. The S&P traded below its 200-day moving average4 for the first time since March, and more than two-thirds of S&P 500 companies also fell below this key technical level, pointing to widespread pain for equity markets.5

Credit markets continued to provide a headwind for equities, with the spectrum of US government bond yields still hovering around multi-year highs. On Monday of last week, the US 10-year Treasury yield broke through the 5% mark for the first time since 2007.

All US stock sectors finished the week lower, apart from utilities, with earnings being the biggest driver.

Some 160 companies in the S&P 500 reported earnings last week, and although earnings and sales have generally surprised to the upside, the misses have been punished more than the beats have been rewarded. Two of the S&P 500 Index heavyweights sold off on earnings misses last week. Meta closed the week down 3.8%, losing some US$30 billion in market capitalisation. Alphabet closed down 10%, shedding nearly US$168 billion in market cap.6

With the “Big Seven” in the United States accounting for approximately 20% of total US single stock net exposure, it is understandable how moves like these can weigh on the broader indices. Both the S&P 500 and the Nasdaq have fallen more than 10% from their highs of July. Note, Apple reports earnings this week on Thursday.

Credit: We have mentioned the impact of tightening credit markets a few times recently, with rates higher for longer and bank lending rates remaining elevated. The impact of this on weak balance sheet companies will be a something to keep an eye on as time passes, with companies forced to refinance at higher levels. Clearly, there is also an impact on the consumer, as mortgage and lending rates rise. Small-cap companies are worth keeping an eye on, as they are more vulnerable to rising interest rates than larger companies.


Last week was another tumultuous one for European equities—the ESTOXX 50 Index posted its sixth down week in a row. Third-quarter earnings season has been the clear focus for markets, with misses being punished quite severely. Yet, with positioning and market sentiment being so bearish heading into this week, it has prevented broader markets from selling off even more aggressively.

The latest ECB announcement came and went without incident, as the central bank paused (as expected) for the first time in 11 rate announcements. Markets are also closely watching the conflict in the Middle East, but the impact has mainly been confined to defence and energy spaces right now.

The bond markets have also kept equities in check, as European government bond yields hover around multi-year highs. It was interesting to see volatility fall back this week. In terms of fund flows, Europe-focused equity funds saw their 33rd consecutive weekly outflow.7

Sector performance was mixed last week, with basic resources stocks outperforming. Miners were better off generally following Chinese and Hong Kong stimulus announcements, which pushed iron ore prices higher. Earnings also helped that space. Aero and defence stocks were also higher last week, with geopolitical tension still elevated in the Middle East. At the other end, autos were the clear laggard amidst some earnings misses, and health care stocks were also weak.

Also, there was particular weakness in UK banks on the back of disappointing earnings. Payments company Worldline fell 60% after releasing a profit warning. One factor for the warning was falling consumer activity in Germany, something that weighed on broader investor sentiment.

European bond yields saw a decline on the back of the ECB meeting. the German 10-year yield fell 5.8 basis points (bps), the Italian 10-year yield dropped 12.0 bps, the French 10-year yield decreased 6.3 bps, and the UK 10-year yield declined 10.8 bps.


Chinese equities outperformed last week following the announcement of several economic stimulus measures. As part of their mid-year budget, the government’s announced plans included issuing additional sovereign debt and raising the budget deficit rate.

Chinese property stocks jumped on reports speculating that the home purchase tax could be cut to 7.5% from 15% for residents buying a second home.

A further positive for China sentiment was a statement from Chinese President Xi Jinping. According to Chinese state media, he said China is willing to cooperate with the United States as both sides manage their differences and work together to respond to global challenges.

In Japan, the higher-than-expected Tokyo CPI number (see above) was in focus ahead of this week’s BoJ meeting.

The week ahead

It felt like Halloween came early for many stocks last week, but this week holds a number of potential drivers, with earnings season continuing a pace and several central-bank decisions as noted. The US October employment report on Friday will be a key focus. In Asia, Chinese Manufacturing PMI data will be key, and in Europe, there are a number of inflation data points to watch for, including the Eurozone CPI on Tuesday.

Clearly, headline risk from the Middle East remains, suggesting that choppy markets will likely continue. Month-end on Tuesday will give us some elevated volumes and perhaps volatility.

Corporate earnings continue to be a key theme again this week. In Europe next week, more than 110 companies in the STOXX Europe 600 Index will report. In the United States, tech heavy weight Apple reports earnings on Thursday.

  • Monday 30 October – Germany GDP/Eurozone Consumer Confidence/Germany CPI
  • Tuesday 31 October – BoJ Meeting/China Manufacturing PMI France GDP/Eurozone GDP and CPI/Italian HICP Inflation & GDP
  • Wednesday 1 November – FOMC Meeting/China Caixin Manufacturing PMI
  • Thursday 2 November – Germany Unemployment/BOE Meeting/South Korea CPI
  • Friday 3 November – France Industrial Production/Eurozone Employment Rate/US employment report

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1. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. Past performance is not an indicator or a guarantee of future results.

2. 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.

3. Source: Bloomberg. There is no assurance that any estimate, forecast or projection will be realized.

4. The 200-day moving average is a technical indicator representing the average closing price of a security or index over the last 200 days.

5. Source: Bloomberg. As of 30 October 2023.

6. Source: “Earnings Season Is Shaping Up Nicely. Investors Don’t Seem to Care.” Wall Street Journal. 28 October 2023.

7. Source: “BofA Strategist Hartnett Sees Risk of S&P 500 Dropping 5% More From Here.” Bloomberg. 27 October 2023.

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