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
The first week of the fourth quarter started off on a brighter note amidst some chatter of “peak tightening” from central banks, but this optimism faded as the week progressed. Several hawkish US Federal Reserve (Fed) speakers and stronger US employment data brought hope that the Fed may pivot soon. Last week, the MSCI World Index was up 1.6%, the STOXX Europe 600 Index was up 1%, the S&P 500 Index was up 1.5% and the MSCI Asia Pacific Index was up 2.7%.
The week in review
Europe
Last week, European equities were choppy following a painful end to the third quarter. The STOXX Europe 600 Index bounced off multi-year lows to end the week higher, its first weekly gain in four weeks. In contrast to recent weeks, events from further afield drove European indices. Early in the week there was some brief optimism on the back of softer macro data from the United States and a smaller-than-expected Reserve Bank of Australia (RBA) rate hike, with the suggestion these were possible harbingers of an easing from centrals bank hawks. This was short-lived. By the end of the week, stronger-than-expected September US nonfarm payroll numbers and further hawkish Fed commentary dampened hopes of the ever-elusive pivot.
Sector-wise, European energy names saw strong gains as West Texas Intermediate crude oil rose 16% after OPEC+ announced cuts of two million barrels per day (b/d). Several banks are now predicting prices at US$100 per barrel again next year. Meanwhile, real estate stocks—the worst-performing sector in the region this year—fell again last week.
Looking at fund flows, European equities are on their longest run of outflows since 2016, with outflows for 34 weeks (US$0.6 billion).
Credit Suisse was a talking point as its share price hit an all-time low, with credit default swaps blowing out early in the week over recapitalisation fears. The stock did recover a little ground later in the week as it proposed a tender offer to repurchase CHF3 billion of its own debt to help the bank manage its overall liability composition and enhance its interest expense. Media reports convey a shortlist of bidders for at least part of the CSGN SW Securitized Products Unit.
United Kingdom: Last week, UK assets stabilised a little after last week’s Bank of England (BoE) intervention, with the pound trading ~1.10 vs the US dollar and gilt yields still tighter than the prior week’s levels. Interestingly, the BoE only bought £5 billion, around 12% of the total it had the potential to buy, as it staved off what was described as a “self-reinforcing spiral” in financial markets. This morning, the BoE has increased the amount it can buy to £10 billon a day ahead of the scheme termination at the end of the week. The central bank also revealed it will operate a collateral repo facility beyond the end of this week that would ease longer-term liquidity concerns.
That said, pressures on the UK consumer remain front and centre. There is a focus on the extreme moves in mortgage rates and the potential impact this will have on the housing market and consumer spending. Elsewhere, the government tried to shore up support for its fiscal plans and Prime Minister Liz Truss spoke about an anti-growth coalition. The government has brought forward its fiscal statement to 31 October in order to shore up market confidence.
Ratings agency Fitch joined S&P in putting the United Kingdom on negative watch.
United States
US equities also saw a strong start to last week, only to fade a bit into the weekend, although the S&P 500, Dow Jones Industrial Average, Nasdaq 100 and Russell 2000 indices all closed higher.
A weaker US Institute of Supply Management (ISM) number and a big drop in the US JOLTS data (Job openings) helped fuel early week optimism, as markets followed a “bad news is good news” narrative. In addition, the RBA hiked rates 25 basis points (bps), which was less than anticipated, fuelling hopes central banks could be poised to pivot. However, a slew of Fed speakers reiterated the hawkish stance throughout the week, with some comments that inflation still remains too high to back down from the tightening cycle.
Finally, on Friday, the September US employment report continued to show the US labour market remains tight, with the headline nonfarm payrolls number showing 263,000 jobs added in September, higher than many observers had anticipated. Average hourly wages fell marginally from 5.2% to 5% but remain at an elevated level.
The S&P 500 Index fell 2.8% on Friday in reaction to the jobs data.
The surge higher in oil prices was the other focus for the week, as OPEC+ defied pressure from US President Joe Biden and announced a two million b/d production cut. This saw the energy sector surge. In response to this, the United States released further supply from its Strategic Petroleum Reserve.
Asia
Last week was quiet for Asian markets in the way of a number of holidays, including Golden Week in China, wherein the Shanghai market was closed for the whole week. Looking at what was open, it was a stronger week for Hong Kong’s market, as well as Japanese and South Korean equities.
The main talking point was the RBA’s decision on Tuesday to lift interest rates by 25 bps to 2.6%, which was less than anticipated. Australian assets traded higher afterward, with the country’s benchmark index showing its strongest week since October 2020.
The week ahead
It looks like a quiet start to the week, as the US bond market is closed for Columbus Day/Indigenous People’s Day, meaning volumes will likely be quieter in the equity market. Later in the week, US earnings season kicks off. Expectations for the coming earnings season are gloomy and will likely be important in setting the tone going into year end.
Macro highlights this week include gross domestic product (GDP) data in the United Kingdom, and in the United States, focus mid-week will likely be on the release of the September Fed minutes and then Consumer Price Index (CPI) data on Thursday.
Tuesday, 11 October 2022
Macro: Italy industrial production; Japan balance of payments current account; UK jobless claims/unemployment; International Monetary Fund publishes its World Economic Outlook and Global Financial Stability Report.
Wednesday, 12 October 2022
Macro: Eurozone industrial production; Japan machinery orders; UK industrial production; UK trade data; UK monthly GDP; US Producer Price Index (PPI); US mortgage applications; US Federal Open Market Committee September minutes; OPEC Monthly Oil Market Report is published; and EU energy ministers meet in Prague, with winter supply shortages on the agenda.
Thursday, 13 October 2022
Macro: CPI Germany; CPI United States; PPI Japan; US initial jobless claims; EIA oil inventory report; G-20 finance ministers and central bankers meet in Washington.
Friday, 14 October 2022
US Earnings: Citigroup Inc. (C US); First Republic Bank/CA (FRC US); JP Morgan Chase & Co. (JPM US); Morgan Stanley (MS US); PNC Financial Services Group I (PNC US); US Bancorp (USB US); UnitedHealth Group Inc. (UNH US); Wells Fargo & Co. (WFC US)
Macro: CPI China; CPI France; CPI Spain; PPI China; China trade data; UK RICS home prices; US retail sales; US business inventories; US University of Michigan consumer sentiment.
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