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, global equities suffered their worst week since the global financial crisis over a decade ago, as concerns over the economic impact of the spread of the coronavirus dampened investor sentiment. The hefty risk-off move came at a time when global equities were trading near new all-time highs. The focus for markets was firmly on the virus, the economic impact and the potential for any central bank or government support.
The FTSE All-World Index declined 13%, wiping out six months of performance, and US$6 trillion was lost in terms of market capitalisation.
As one might expect, perceived “safe haven” assets saw huge inflows, with the US 10-year Treasury yield falling below 1.2% on Friday. The move did feel like capitulation, as investors de-risked ahead of the weekend and month-end.
Although defensive sectors fared slightly better than the broader market (albeit still down), overall the selloff did feel indiscriminate and broad-based. That said, it was interesting to see European value stocks generally pull out a positive performance last week. It comes as no surprise that trading volumes overall were huge, significantly above the norm.
Corporate credit markets also saw signs of strain in both the United States and in Europe.
As we observe this latest equity correction, there is naturally a lot of debate about where markets might go next. At the risk of stating the obvious, what makes it harder is that no one is entirely sure what to price into the market, and there is a lively debate around whether the markets could see a V-shaped or U-shaped recovery this week. Some observers have noted that market corrections are not necessarily predictors of recessions, so this latest downturn doesn’t mean the global economy is primed for a downturn.
"Whatever It Takes"
Quoting former European Central Bank (ECB) President Mario Draghi in regards to saving the euro in 2012, there is currently hope of a “whatever it takes” style moment from global central banks. However, questions remain over the effectiveness of central bank action to combat a pandemic-led slowdown, with government fiscal stimulus seen as far more effective. So far, we have these comments in Europe:
It’s the tail end of earnings season in Europe and we’re seeing an increasing number of companies offer cautious commentary around the unknown future impact of the coronavirus on earnings. Even those companies reporting solid results have struggled to make headway in the global selloff. In addition to those already scheduled to give a market update, we are increasingly seeing other companies report their concerns. For example, early in the week, Lufthansa mentioned potential cost cutting (hiring freeze, offering unpaid leave) after saying that the cancellation of flights to China was detrimental.
Other airlines have followed suit, with International Airlines Group and easyJet both reporting substantial knocks to demand, announcing measures including aircraft redeployment and hiring freezes. KLM is delaying investment in IT and real estate. The travel and leisure sector unsurprisingly has been the worst hit sector in the STOXX Europe 600.
As we kicked of the first trading day of March, the markets seemed to pause for breath after news of stimulus from Italy and the BOJ. Sentiment remains extremely brittle, however. There does not feel like there is much conviction behind the calmer start to the week here in Europe.
The German political situation has been shaken up as Hamburg citizens recently took to the polls. We expected to see more discussion around this and market impact, but with investor focus elsewhere, it was fairly quiet. The Christian Democratic Union got the lowest number of votes in what was a post-WWII low, which will have now accelerated the process to find a new party leader.
EU Macro Data Improves
Again, it was mostly lost in the noise, but we did see an improvement in EU macro data. The German consumer price index came in better than expected at 1.7%, vs. 1.6% previously. The Spanish reading was also better than expected, and French data was in line with expectations, giving some hope that the impact of the virus has been limited so far. The German IFO business climate data also came in stronger than expected, and French manufacturing and consumer confidence both beat expectations.
This week we get the eurozone inflation reading and full Purchasing Manager Index (PMI) reports, which will be in focus for many.
It’s worth highlighting the escalating crisis in Syria as another danger for European sentiment/markets. Overnight on Thursday, Russian-baked Syrian forces killed 33 Turkish soldiers. If Turkey steps back from defending the last rebel enclave, we could face another refugee crisis in Europe that would put huge strain on the EU.
Another refugee crisis would be extremely destabilising and could further fuel the rise of populism across the continent. Over the weekend, we saw further escalation of the conflict, and Turkish President Recep Tayyip Erdogan is expected to meet Russian President Vladimir Putin next week, despite strained relations.
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