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 was choppy for equities. The Stoxx Europe Index 600 closed down 1.95%, but European equities did outperform US equities, with the S&P 500 Index closing down 2.9%. Markets in the Asia Pacific (APAC) region were mixed in a holiday-shortened week, with mainland China and Japan managing to make small gains.
Clearly, the continued easing of lockdowns was in focus, with a close eye on an infection rates. For the most part, Europe tends to be faring relatively well, whilst the US rate is sharply on the rise, seeing record one-day increases in cases.
The midweek market selloff in Europe followed a move lower in the United States after reports on the resurgence of the virus. Dr. Anthony Fauci, the director of the US National Institute of Allergy and Infectious Disease., reported a “disturbing surge” in cases in the country. Headlines on 26 June that Texas would be rolling back some lockdown easing measures given the spike in cases dented sentiment, causing US equities to sell off and close the day down 2.5%. Infrastructure is starting to be stretched again too, with intensive care units in the city of Houston reported to be at 100% capacity.
Meanwhile, negative Chinese macro data (car sales were -11% year-over-year), speculation around US/EU tariffs, and recently lowered global growth forecasts from the International Monetary Fund also played into bearish sentiment globally.
European equities have outperformed US equities for the past two weeks, and amid the cyclical rally last week, there was continued saw discussion about whether this dynamic has further to run. There are a number of potential catalysts feeding into the argument that it does. Some reasons we see:
On the macro data front, June Purchasing Managers Indices (PMIs) were released last week in Europe and came in ahead of expectations. The data showed a strong rebound across the board, with France moving out of contraction. We saw some other positive economic data releases; retail sales in Spain jumped 19.3% in May, whilst consumer confidence improved more than expected in both Italy and France.
We would note, however, that ECB President Christine Lagarde warned last week that Europe’s recovery will be “restrained” as increasing household savings hold back consumer demand. The negative impact of the pandemic on global trade is already extreme, and activity is likely to continue be “significantly reduced” by the fallout, according to Lagarde, who added that lower productivity owing to less efficient supply chains would lead to an incomplete economic recovery.
As noted, European equities lost almost 2% last week, but did outperform their US counterparts. Looking at sectors, the autos managed to only make a small loss with travel & leisure the clear underperformer. Better-than-expected PMI data was also in focus in Europe, and we saw more discussion over the potential for European equities to outperform their peers in other regions. The selloff came on lower volumes, with volumes 20% lower than year-to-date averages, suggesting there was not a great deal of conviction.
Banks came into focus over the weekend after the Financial Times highlighted global equity fund managers have reduced their exposure to European banks to the lowest level in more than a decade. The article cited data from Copley fund research, which tracks US$760 billion of global equity assets under management. The question now is whether valuations now become more attractive to investors, especially given the provision of stimulus from the euro area.
Whilst China/US relations tend to dominate headlines, there is increasing focus on the escalation of EU/US trade tensions. The United States is apparently weighing a fresh round of tariffs on US$3 billion in a number of different imports from France, Germany, Spain and the United Kingdom, according to a notice published by the US Trade Representative. There is a month-long US public comment period that will end on 26 July, so we will be watching for updates.
EU Foreign Policy Chief Josep Borrell also commented last week that the EU is considering retaliating in response to US sanctions against the Nord Stream2 pipeline; the US imposed sanctions at the end of last year on European companies working on the project given it is part funded by Russian company Gazprom. The EU is also moving towards putting a US travel ban in place—so, there are plenty of potential downside risks to be watching.
The other clear risk for the region is Brexit. Over the weekend, German Chancellor Angela Merkel downgraded her expectations of a deal, suggesting that the UK government may not even be interested in coming to an agreement. This has seen the pound slide back below 1.10 vs. the euro as we kicked off trading this week.
US equities underperformed global equity markets, with all three major US indices lower last week. All sectors were in the red, with the energy and financial sectors the week’s losers. Clearly the main focus was the uptick in COVID-19 cases, with the seven-day average at 35,206 on 26 June from 24,567 the previous week—the highest since the outbreak started. It is somewhat of a mixed picture, with the southern and western parts of the country seeing the most pickup, notably the states of Texas, Florida, Arizona and California. Texas rolled back some lockdown easing measures on 26 June and Florida banned the sale of alcohol in bars and restaurants.
The White House has continued to play down the escalation and the risks, which only heightens concerns with the potential for slower action and a continued increase in cases.
There was some cautious action from the Federal Reserve last week, with the central bank telling the largest US banks to continue the blanket ban on stock buybacks until at least the end of September, whilst dividends are restricted from exceeding the level of the previous quarter. This saw the US banks -7.2% on the week.
Markets in the APAC region were mixed in what was a holiday-shortened week for China and Hong Kong. Mainland Chinese equities (with markets only open three days) made small gains, as did Japan, whilst Hong Kong closed the week down slightly. Midweek, the US Pentagon put Huawei and Hangzhou Hikvision on a list of 20 firms it says are owned or controlled by China’s military, possibly opening them up to more US sanctions.
China’s market was shut on Thursday and Friday of last week, so any negative impact on equities was spared, but equities in the region were weaker as trading kicked off this week. Geopolitical concerns continued to bubble over the weekend after reports that the US government warned Hitachi against selling a nuclear power project in North Wales to China. The EU also said that investment talks with China were reaching a critical stage, so there is plenty of risk on the geopolitical front.
This week looks to be a relatively quiet week ahead on the macro front in Europe but there are a few releases to watch.
Most importantly, on 30 June we have EU inflation data (Flash Consumer Price Index (CPI); and on Wednesday we have the Global Manufacturing PMI for June as well as the Riskbank monetary policy meeting (expectations are for interest rates to remain unchanged). In the United States, the June employment report will be the highlight on 2 July. After the last upside surprise in non-farm payrolls, any revisions will be in focus.
In the United Kingdom, we have “fiscal Tuesday” this week. On 30 June, UK Prime Minister Boris Johnson will set out a “Big Plan” for prosperity. This is the first of what looks like a series of policy/fiscal statements over the next couple of weeks. The key to watch in the announcements is how much is new cash and how much is the same cash being re-announced. According to reports, relatively little is new cash for this year, £700 million (0.035% of GDP). It looks as though risks are to the downside, with figures likely to underwhelm.
Brexit negotiations continue and 30 June also marks the Brexit extension deadline. It is widely expected that the United Kingdom will not extend the transition period past the end of this year.
1 July – Russia
3 July – United States
Monday 29 June:
Tuesday 30 June:
Wednesday 1 July:
Thursday 2 July:
Friday 3 July:
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