Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets.
The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience 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.

Last week proved to be positive for global equities as sentiment improved not only around the chances of a trade deal between the United States and China, but also on Brexit. Despite being light on
detail, rhetoric was supportive over the potential for progress on both and markets reacted well. In terms of sector moves, sentiment was very much risk-on, with growth sectors outperforming and
defensives lagging on the week.

The Digest

Brexit Progress At Last?

Last week eventually provided some much-needed relief for sterling and UK equities, as hopes rose that the United Kingdom and European Union (EU) might finally be moving closer to a Brexit deal.

Interestingly, the tone throughout much of the week had been one of pessimism as reports came through that EU leaders were very doubtful about the chances of a deal.

On Thursday, feedback from a meeting between UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar drove the biggest positive change in sentiment we have seen since the
referendum. Varadkar said Johnson could secure a deal, with both parties saying that they could now see a “pathway” to an agreement.

Before Thursday, the market had been pricing in a further extension to Article 50, rather than a deal. So markets were naturally buoyed on Friday as optimism grew around a possible compromise
and the potential end to the political uncertainty.


Sterling closed up 3.6% versus the dollar on Friday from midday on Thursday, touching US$1.27 for the first time since June.

While the exporter-heavy FTSE 100 Index was up just 1.3% last week, the more domestically focused FTSE 250 Index was up 2.9% on the week. The UK banks especially benefitted.

Despite the market’s optimism, details were light by market close on Friday and it was difficult to see the basis on which there should be such a stark change in market sentiment.
Therefore, Friday’s market moves were a great illustration of how underweight the market is on UK exposure.

It is important to note that both sides are aware that there is still a significant amount of work to be done if a deal is to be worked out and signed off at this week’s summit of EU leaders.
One European official said that talks on Monday of this week would be “one last chance” to work through the sticking point. Otherwise, they risk failing to agree a deal by the start of the summit.

The timeline:

  • Thursday, October 17: Two-day EU summit, the last scheduled meeting before the October 31 Brexit deadline. We expect to see a constant flow of headlines in the lead-up.
  • Saturday, October 19: The Benn Act forces Boris Johnson to ask for an extension if there is no deal approved. There is also a special sitting of parliament.
  • Thursday October 31: The day on which the UK must leave the EU should no extension be granted.

We also saw some further evidence of the impact the dragged-out process is having on the UK economy.

Productivity in the second quarter contracted at the fastest pace in five years, lagging well behind the Organization for Economic Cooperation and Development (OECD) average.

Elsewhere, London’s initial public offering (IPO) market suffered its quietest quarter in 10 years, with most observers citing political and economic uncertainty as the catalysts.
Just four UK companies listed on stock markets in the third quarter. We also saw a number of domestic UK companies issue profit warnings last week; all of the companies cited Brexit
and the accompanying uncertainty as reasons.

US/China Breakthrough On Trade Too?

Hopes of a US/China trade breakthrough coincided with the positivity around Brexit last week. Headlines throughout the start of the week had been numerous and mixed, but
on Thursday and Friday sentiment got a boost as negotiations resumed in Washington

Both sides signalled they were cautiously optimistic in securing a partial deal that could lead to a temporary truce on tariffs. On Friday afternoon, US President Donald Trump said the two
sides had reached a “phase one deal”. This saw all major US indices close the week higher.

As part of the tentative deal, there were reports that China was willing to increase purchases of US agricultural products by US$10 billion annually in order to stave off tariffs.

We then saw subsequent headlines that the United States was looking at rolling out a previously agreed currency pact as part of an early harvest deal that could also see a suspension
of a tariff increase next week.

In addition, the Trump administration was said to be planning to issue licences allowing some American companies to supply non-sensitive goods to the
Chinese telecom giant Huawei.

While all of this helped to boost sentiment towards the end of the week, it is important to note that commentary from China remained cautious.

Neither the Chinese Ministry of Commerce nor Chinese state media referred to the outcome as a “deal”. Instead, they noted only that progress had been made in numerous areas. China also
failed to make any mention of the US’s promise not to raise tariffs, or Beijing’s commitment to boost agricultural purchases.

For his part, Trump said the phase one deal would be formalised in writing in the next several weeks, and he may be able to sign the agreement with President Xi Jinping at next month’s
Asia-Pacific Economic Cooperation (APEC) Summit in Chile (November 16-17).

Reports early this week have suggested China wants more talks before signing Trump’s phase one deal. As a result, equity markets fell back in early trading on Monday of
this week before making a partial recovery. Time will tell if this sets the tone for what is expected to be a noisy week with regards to trade headlines.

The US Federal Reserve (Fed) Steps In

With markets higher on the back of the Brexit progress and the improvement in US/Chinese trade negotiations, the Fed added fuel to the rally by announcing US$60 billion worth of monthly
Treasury bill purchases until the second quarter 2020 in order to get a grip on money market rates. Fed Chair Jerome Powell stressed that this action should not be confused with
quantitative easing, but the development was taken well by markets nonetheless.

All of this saw risk-on sector and style rotation. Within equities, cyclical stocks markedly outperformed defensives and we saw selling in momentum-style names moving into value stocks
in both the United States and Europe. In Europe, basic resources, banks and technology were the winners, while food & beverages, media and health care closed the week lower.
The reflation trade was back in play, with US bond yields jumping as minutes from the most recent Federal Open Market Committee (FOMC) meeting also played into this dynamic.

Last Week


In Europe, the main focus last week was on Brexit, and broad market moves reflected this. Stocks in much of Europe closed the week higher, with Germany outperforming among the major indices.

Better industrial production data for August further supported equities in Germany. Improved sentiment around a US-China trade deal and the news of tax changes in China, which may help
sales of German cars, also helped the autos sector.

Turkey was the notable underperformer in the region, as political uncertainty rose after Turkey’s military moved into Northern Syria. This is not expected to move markets in itself. However,
Trump’s assertion that he will “destroy and obliterate” Turkey’s economy if it were to breach red lines with regards to the US’s Kurdish allies prompted some caution among investors.

Any economic downturn could have a dramatic impact on Turkey’s risk profile and cost of capital prompting investors to cut exposure to the country last week. The Turkish Lira also suffered.

Last week’s European Central Bank (ECB) meeting proved largely underwhelming. There was a somewhat hawkish slant to commentary.

In the general election in Poland over the weekend, the nationalist Law and Justice party looks set for victory. Early indications suggested the current ruling party was due to take a majority of
seats once again in the Polish parliament. The newly formed centre-right Civic Coalition party looks set to take up the role of opposition.


US equities were better across the board last week amid improving trade sentiment and the Fed’s Treasury bill-buying announcement.

FOMC minutes on Wednesday were in focus and reinforced the divide among voting members when it came to the September interest-rate cut. However, the minutes did little to move the needle,
and policymakers are concerned that the market is expecting more rate cuts than the committee is willing to give.

Powell reiterated that the US economy is in good shape, although the
headwind to growth from trade policy was mentioned 16 times in the FOMC discussion of the outlook. The majority of FOMC members who voted for last month’s interest-rate cut cited trade,
slowing global growth, low inflation and risk management as drivers for the move. Notably, US inflation data came in softer than expected last week.


Equities in the Asia-Pacific region also took part in last week’s rally, with trade being the clear focus. China outperformed. Outside of the US/China headlines, Japan and the
United States signed a limited trade deal which covers agriculture as well as digital products and services. Along with a weaker yen given the risk-off tone, this pushed Japanese
stocks up on the week.

Australian equities also managed to advance despite weaker data showing that consumer confidence fell to a four-year low, even with the three recent interest-rate cuts from the Reserve Bank
of Australia (RBA).

Week Ahead

It promises to be an interesting week with plenty of potential for market-moving macro headlines around the same themes as last week. In addition, investors will be eyeing the start of
the third-quarter earnings season.


  • Investor attention will likely centre on the Brexit-focused EU summit on Thursday and Friday. We expect a flow of headlines through the start of the week before more substantial insights
    at the end of the week on the potential for a deal or the length of any extension.

Monetary Policy

  • US Fed speakers are expected on Tuesday, Wednesday and Thursday with the Fed releasing its Beige Book report on Wednesday.
  • ECB speakers are due on Monday, Wednesday and Thursday ahead of the ECB’s release of current account data on Friday.


  • In Europe: eurozone industrial production on Monday; UK jobs on Tuesday, eurozone car registrations and trade balance and UK inflation data on Wednesday; UK retail sales on Thursday.
  • In the United States: retail sales and business inventories on Wednesday; housing starts on Thursday.
  • In Asia: Chinese inflation data on Tuesday; Chinese gross domestic product (GDP), industrial production and retail sales and Japanese consumer price index (CPI) on Friday.

Franklin Templeton Key risks & Disclaimers: 

What Are the Risks?
All investments involve risk, 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.
Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may
decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve
heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of
future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 14 October 2019, and may vary from the analysis and opinions of other investment
teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may
change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute
investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.
This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security.

Nothing in this document may be
relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held
by any portfolio advised by Franklin Templeton.

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. 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 by FT
affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and
services in your jurisdiction.

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML
is authorised and regulated by the Financial Conduct Authority.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced
information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information
purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in
this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding
the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the
time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go
down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to t
he past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details
contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.


We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to

For a comprehensive list of documentation required to open a corporate account please contact us by email at or by phone on (+356) 2557 4444.