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

Global equities marched higher again last week, with the MSCI World Index up 2.6%, the S&P 500 Index up 2.5%, the STOXX Europe 600 Index up 0.9%, and the MSCI Asia Pacific Index up 2.8%.1 We had central-bank announcements from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) last week. The key driver behind the equity market moves was the Fed’s signalling of rate cuts in 2024, with the message that inflation had surprised to the downside taken as dovish. The market reaction was risk-on. The US dollar fell back to levels last seen at the start of August, while the US 10-year Treasury yield dropped to below 4%.

In line with the dovish narrative, data out of Europe, the United Kingdom and the United States were soft, adding weight to the calls for rate cuts. Market sentiment indicators turned more bullish again last week; the Bank of America Bull & Bear Indicator moved up to a reading of 4.7 vs. 3.8 in the prior week.2 In another bullish datapoint, global fund flow data from last week showed the first weekly outflow from money market funds in eight weeks, totalling US$31 billion.3

On Wednesday, the Federal Open Market Committee (FOMC) announced its decision to keep interest rates on hold as expected. This is the third consecutive meeting the committee has held rates steady at 5.25%-5.50%. Prior to the meeting, expectations had risen for rate cuts in 2024; however, a slightly stronger-than-expected Non-Farm Payrolls report the previous week had tempered expectations for this meeting a little. This time last week, the market was pricing in a 60% chance of a cut in March. This morning, that probability stands at 73%.4 The key driver for the move was Fed Chair Jerome Powell’s statement that some discussion on possible rate cuts had “come into view”.

The Fed’s forecast known as the “dot plot” also signalled that rate hikes are over, as the FOMC is now looking for three 25 basis-point (bp) cuts in 2024, which is still notably less than the five to six cuts which the market is pricing in. However, the key message from the whole event was simply that the Fed is very likely to be done with hiking and is also likely to begin cutting rates next year. The market took this as a green light to add risk.

That all said, market sentiment has been tempered since the announcement, with three Fed members, John Williams, Austan Goolsbee and Raphael Bostic, pushing back a bit on the dovishness. On Friday, Williams (one of the more centrist Fed members) said that the Fed wasn’t talking about rate cuts right now, stating the “committee doesn’t have plans around that”.5 Goolsbee followed this up by stating: “We’ve made a lot of progress in 2023, but I still caution everyone, it’s not done.”6  Bostic also made comments over the weekend which were out of kilter with market expectations, stating he saw fewer rate cuts than the market currently expects, with the first coming later in 2024. So, whilst there does seem to be some consensus between the Fed and the Street that rate cuts are coming in 2024, there is still clear uncertainty in the extent and timing of those cuts.

Whilst the Fed grabbed most of the headlines, it was a week of central-bank announcements in Europe too, with the ECB, BoE, Swiss National Bank and Norges Bank all announcing interest-rate decisions. On Thursday, the ECB kept rates on hold, but noted a significant decline in inflation in the eurozone. The market is currently siding with the first ECB rate cut coming in March next year, which is slightly earlier than the Governing Council seems to see it, based on President Christine Lagarde’s comments. Lagarde referred to a “plateau” between the last hike and the first cut.7 She was a little more cautious on inflation, as she emphasized the resilience of domestic and mainly wage-driven inflation. With that, she noted that wage pressures may not retreat as quickly as hoped, in order to return to 2% inflation by the end of 2025.

Like the aforementioned Fed members, some ECB members pushed back on the market’s rate cut expectations, with several commenting that the market’s rate-cut expectations were a little premature.

The BoE also announced its latest rate decision on Thursday, keeping rates on hold as expected. There wasn’t too much in the announcement to change the narrative; however, the vote split of 6:3 was taken as hawkish. The Monetary Policy Committee kept its forward guidance and said there is “some way to go” on inflation and policy would need to be kept sufficiently restrictive for a long period. The pound rallied vs. the US dollar, hitting levels last seen in August.

The Swiss National Bank also kept rates on hold, whilst stating, “inflationary pressure has decreased slightly over the past quarter; however, uncertainty remains high.” Norges Bank unexpectedly raised rates by 25 bps to 4.5% and noted that “the economy is cooling down, but inflation is still too high. The policy rate will likely be kept at 4.5% for some time.”8

Week in review


European equities notched their fifth consecutive weekly gain last week. The STOXX Europe 600 Index closed the week up 0.9% and is now up 11% from the late October lows. As noted above, the Fed, ECB and BoE announcements were at the forefront. Volumes were significant too. European equity funds had another outflow week, the 40th consecutive one, as they lost US$1.5 billion on a week of large inflows into global equities.9

In terms of European equity markets, in the context of risk-on sentiment and increased bullishness in markets, cyclicals outperformed defensives again. European small caps outperformed the broader index. Real estate stocks outperformed again last week on hopes of lower rates. With cyclicals favoured, construction and materials stocks were also strong. Insurers were among the underperformers.

Macroeconomic data was on the weak side in Europe last week. Eurozone Purchasing Managers Index (PMI) data continues to point to a softer economic environment, with the Composite figure coming in at 47.0 (less than expected) vs. 47.6 previously. Both components, manufacturing and services, came in softer than anticipated. New orders were weak as well; however, in a small bright spot, it was good to see the pace of decline fall in manufacturing new orders. In addition,  corporate sentiment regarding the year ahead appears to be improving, with sentiment at its best level since August.

In the United Kingdom, whilst the PMI data beat expectations and printed again in expansion territory at 51.7, the October gross domestic product (GDP) data surprised to the downside, falling 0.3%. The data was weak across the board, with services production declining 0.2% on the month and manufacturing production falling a substantial 1.1% in October.

United States

Wednesday’s surprise Fed pivot caught investors off guard, and the reaction was a surge higher in risk assets. Markets did pause for breath on Friday, after more cautious comments from Williams, but indices were still comfortably higher on the week. The S&P 500 Index rose for a seventh straight week, up 2.5%, which is its best run of weekly gains since 2017. The Nasdaq 100 Index traded up 3.3% and made new all-time highs, passing the previous 2021 high. There was good breadth to the gains, too.

The Russell 2000 Index gains since its October lows are impressive, up 21% (vs. the S&P 500 Index gain of 17%), moving from 52-week lows to 52-weeks highs in just 48 days.10

Looking at other asset classes, moves in the Treasury market were equally impressive, with the US 10-year down 31.5 bps to 3.91%, falling below 4% for the first time since August. The US dollar declined versus other major currencies, with the US Dollar Index down 1.4% last week.11 The VIX fell to 12, below pre-pandemic levels.12

Sector-wise, cyclicals did well, with materials and industrials stocks outperforming, whilst communication services lagged.

There were a couple of other macro data points worth noting last week. The US Consumer Price Index (CPI) was largely in line with expectations, with the headline CPI up 0.1% month-over-month (m/m).  The November Producer Price Index (PPI) also continued to fade, with core PPI 0.0% m/m. Elsewhere, the US PMI missed expectations, with manufacturing slipping to 48.2 vs. 49.4 previously, although services were stronger at 51.3 vs. 50.7 prior. Finally, the Empire Manufacturing survey missed expectations, with a reading of -14.5.

Whilst many investors are enjoying the recent “Santa” rally, it is worth noting there are signs of economic contraction in the United States, which we need to monitor into 2024—including corporate bankruptcies.

Although interest rates are expected to decline in 2024, they are still at levels where some businesses will feel pain.

Finally, it is no surprise to see investor sentiment, as measured by the CNN Fear & Greed Index, in the ‘Greed’ camp, as it has been for some time now.13


Last week was much better for Asian equities after a couple of uninspiring weeks, with the MSCI Asia Pacific Index closing the week up 2.81%.


After falling over 3% the previous week, the Nikkei Index rallied to close the week up 2.05% on the back of the dovish Fed release on Wednesday.

The stronger yen versus the US dollar took a hit on Japanese exporters.

Japanese government bonds rallied, with the yield touching a low of 0.621%, having dropped from 0.77% a week before, as investors focused more on the Fed over the continued belief that the Bank of Japan (BoJ) will end its negative interest rate policy soon.

Economic data last week was mixed. December PMI data showed that Japan’s private sector experienced a mild expansion in business activity over the month, as a stronger rise in services activity offset a quicker contraction in manufacturing. Also, the BoJ’s quarterly “Tankan” survey suggested growing optimism among Japan’s large manufacturers.

Sector-wise, machinery, services and shippers were the best-performing sectors, whilst insurance, banks (on falling yields) and foods were the worst-performing.

On the political front, Prime Minister Fumio Kishida came under huge pressure last week after his party, the Liberal Democratic Party, came under corruption investigation. As a result, four cabinet ministers resigned.

This week the BoJ holds its policy meeting on 18/19 December, and on the data front, the November CPI comes out on Thursday.


After falling 2.05% the previous week, Chinese equities continued to decline, with the Shanghai Composite closing last week down 0.91% on the back of increasing economic concerns.

The Central Economic Work Conference (CEWC) concluded with a disappointing policy tone that showed no willingness to ramp up stimulus; meanwhile, Reuters reported that China will keep its fiscal deficit at the same level as 2023, which is not aggressive enough to boost the economy.[14]

November data last week showed the CPI dropped by 0.5%, as lower pork prices weighed on food prices. Also, November loan data was weak, with Total Social Financing only CNY2.45 trillion, lower than expected. Deflation is concerning for China, since economists worry it could unleash a downward spiral of economic activity.

Sector-wise, entertainment stocks performed well as investors speculated on the potential winners in a recessionary environment. Retail  and textiles were relatively resilient, as they have already suffered substantial losses year-to-date. Food and beverage names were crushed last week on news indicating weak demand and price competition, which dampened sentiment. Renewables sold off again on the back of a gloomy 2024 outlook, as the entire industry faces overcapacity issues.

Looking ahead, we have the Loan Prime Rate (LPR) decision this week, with low expectations of a rate cut, as the People’s Bank of China (PBOC) normally don’t cut benchmark interest rate at year-end to avoid a mortgage rate-cut for existing home loan owners.

Hong Kong

The Hang Seng finished the week higher, up2.80% on the back of read-across from the dovish Fed release. Chinese developers mostly gained amidst company buybacks, as well as China’s relaxation of homebuying curbs in Beijing and Shanghai, driving the sector higher on Friday.

The auto sector rose, after data from China Automobile Dealers Association (CADA) showed that retail sales of domestic passenger vehicles rose 25.9% year-over-year (y/y) )in November; meanwhile, China announced the list of electric vehicles that will be subject to purchase tax exemption.

Shares of Chinese drugmakers gained after some medicines were included in the National Reimbursement Drug List that was released by the National Healthcare Security Administration on Wednesday.

Macro week-ahead highlights

UK inflation data in the week ahead is likely to show price pressures eased further in November to undershoot the BoE’s forecast yet again. The overall picture is that the United Kingdom still has a bigger inflation problem than the United States and euro-area. Nevertheless, it’s now expected that the central bank will start to cut interest rates from June 2024.

In the euro area, the larger-than-expected drop in headline and core inflation in November contributed to investors’ pricing in an earlier interest-rate cut. The final release will provide more insight into the drivers for this downside surprise and their likely persistence.

Week ahead: Key events

Monday 18 December 

  • Germany IFO Expectations Survey
  • Bank of Japan Meeting (18-19 December)

Tuesday 19 December                     

  • Euro-area Final CPI Inflation
  • US Housing Starts

Wednesday 20 December 

  • UK CPI

Friday 22 December

  • UK Retail Sales

Views you can use

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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 Investment Strategy. The Bull & Bear Indicator is a measure of market sentiment.

3. Source: “BofA’s Hartnett Says Flurry of Rate Cut Bets Drive Broad Rally.” Bloomberg. 15 December 2023.

4. Source: Bloomberg. Based on fed funds futures. There is no assurance that any estimate, forecast or projection will be realised.

5. Source: “New York Fed President John Williams: We aren’t really talking about rate cuts right now.” CNBC. 15 December 2023.

6. Source: Fed’s Goolsbee Says Too Early to Declare Victory Over Inflation.” Bloomberg. 17 December 2023.

7. Source: European Central Bank. Press conference. 14 December 2023.

8. Source: Swiss National Bank. 14 December 2023.

9. Source: BofA, EPFR Global data. Week ended 13 December 2023.

10. Source: Bloomberg. As of 15 December 2023.

11. The US Dollar Index is a relative measure of US dollar strength against a basket of six other international currencies. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.

12. The CBOE Market Volatility Index (VIX) 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

13. 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. Past performance is not an indicator or a guarantee of future results.

14. Source: “Exclusive-China to run budget gap of 3% of GDP in 2024, issue special debt -sources. Reuters. 14 December 2023.

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