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.
Global equities reversed some of the previous week’s losses, with the STOXX Europe 600 Index making new all-time highs and closing up 3.3%, whilst the S&P 500 Index posted its biggest weekly gain since June last year. Concerns around the coronavirus faded a bit, and earnings were mostly supportive.
Equity markets in the Asia-Pacific (APAC) region were mixed, as the Shanghai Composite lost 3.4% after reopening following its coronavirus-driven closure. It did stage a recovery later in the week, but not enough to erase earlier losses.
Whilst coronavirus fears seemed to have eased from the prior week, the spread of the virus was still the main talking point of the week. Chinese markets reopened on Monday 3 February and saw the Shanghai Composite Index sell off dramatically, closing the day near its lows. Fears did ease throughout the week though, on hopes that the economic impact would be limited and that central bank stimulus would help to contain market shocks.
Optimism sparked a risk rally later in the week following reports that a significant breakthrough had been made in the development of a potential vaccine for the virus. However, the World Health Organization played this down, and we continued to see new cases confirmed and the death toll rise.
The headlines did help markets recover nonetheless, as did action from the PBOC. The central bank made its first moves to support declining markets and the economy by providing short-term loans to banks and cutting the interest rates on these loans to 10 basis points (bps). The so-called “use reverse repurchase agreements” aimed to supply 1.2T yuan of liquidity to financial markets, the largest single-day reverse repo operation ever conducted. With this, losses on the week were stemmed to a more muted level.
On Thursday, China’s government announced it would cut tariffs on hundreds of US goods by half, starting from 14th February. The Chinese Ministry of Finance stated they were imposed in order to “advance the healthy and stable development of China/US trade”. This is likely another attempt to improve sentiment given the coronavirus backdrop.
Whilst the markets reacted positively to the news, the cynics may say that this (alongside the PBOC intervention) highlights just how concerned China is about the outbreak, playing into speculation that the extent of the issue within China is being underplayed.
That said, the number of new cases per day has started to drop, suggesting there is some level of control. Multiple estimates of the potential impact of the virus were released last week.
Notably, Dallas Federal Reserve President Robert Steven Kaplan said that the coronavirus could subtract about 0.4% from US gross domestic product (GDP) growth, though we think there are too many unknowns to put too much weight on such estimates.
Coronavirus concerns seem to be on the rise again, with European equities putting in a lackluster performance on 10th February 2020. The main concern now is if, how and when China can return to normal operating capacity. Supply chain breaks are a major concern globally. Clearly, data points for February will be vital in assessing the impact on global growth.
European markets put in an impressive performance last week as coronavirus concerns waned and the busiest week of earnings season so far showed companies reporting better results on average. Results for the banks were surprisingly strong and helped to drive considerable outperformance in the sector, alongside some risk-on rotation. This helped Italy outperform and all sectors there closed in the green, with the more defensive names underperforming.
The Citi Economic Surprise Index, which measures data surprises relative to market expectations, has now turned negative.
Whilst the eurozone Purchasing Managers Index data was a little better, December retail sales for the region were soft. German industrial data was also disappointing as industrial production, factory orders and exports all missed analysts’ expectations.
The British pound was one of the week’s losers as UK Prime Minister Boris Johnson failed to spark confidence, saying that there was “no need” for the United Kingdom to follow European Union (EU) rules on trade. He raised the prospect of a return to World Trade Organisation terms if EU negotiators decline to agree on a Canada-style deal. Under the EU-Canada deal, import tariffs on most goods have been eliminated between the two countries, though there are still customs and value-added-tax (VAT) checks.
For its part, the EU has insisted on a level playing field agreement on rules and standards. It also wants a deal that includes access to the UK’s fishing waters. We can expect noise on trade to continue now that both sides have outlined their negotiating positions.
Over the weekend, the Republic of Ireland took to the polls in a general election. Exit polls showed the election looked like a three-way tie, with Leo Varadkar’s Fine Gael party clinging on in first preference votes. With all first preferences now counted, however, left-wing Sinn-Fein (which was the political wing of the IRA) have come out ahead of the two establishment parties.
The Proportional Representation system is likely to see Fianna Fail gain the most seats overall, but Sinn Féin President Mary Lou McDonald has described the Irish general election as “something of a revolution in the ballot box”, given the usual two-party system. Sinn Fein has now demanded to be part of the next Irish government. No party will win enough seats for an outright majority, and with that Irish names are underperforming as negotiations to form a government are likely to be drawn out and difficult. Speaking in Cork yesterday, Fianna Fail’s Mr Martin refused to rule out working with Sinn Fein, despite insisting he would not do so during the campaign.
Looking at the implications for Brexit, if Sinn Fein succeeds in striking a coalition deal and enters the government, it will likely lead to an even tougher line from Dublin (and thus the EU) during talks on its future relationship with the United Kingdom. Sinn Féin was a vocal opponent of the deal struck between Johnson and Varadkar that laid the path for the current Brexit deal.
In Germany, there was a lot of noise over the weekend about politics. Annegret Kramp-Karrenbaur, Angela Merkel’s first successor as Christian Democratic Union (CDU) leader, is to stand down and isn’t going to run as chancellor. Insubordination from CDU members in the German state of Thuringia last week reinforced her recent waning influence and respect. The Thuringia CDU vote alongside the far-right Alternative for Germany (AFD) in order to elect a liberal Free Democrat as leader of the region against Kramp-Karrenbaur’s directions. This move may create an issue for the CDU in the medium term, but for now it means that Merkel has no internal challenger.
Merkel is seen as stable, and this should be good for the EU in the short term at least. It is likely that the current grand coalition will retain power now, likely until September of next year.
Last week was strong for US equities, as concerns around the spread of the coronavirus began to subside. The S&P 500 Index was up 3.17%, its largest advance since June. There were limited macro-data drivers behind the move; however, the news that China was pledging to half tariffs on US goods certainly helped sentiment.
Technology stocks continued their year-to-date outperformance, whilst. utilities pared some of January’s gains to finish the week as the only sector in the red. The macro-economic releases were largely positive, with the Institute for Supply Management manufacturing index seeing an expansion for the first time since July. Also, the January employment report (released on Friday) was strong.
The US state of Iowa held its Democratic party caucus, the first state to kick off the voting process in the primary race leading up to the presidential election. It garnered some attention earlier in the week amid Delays in announcing the outcome. Pete Buttigieg was the surprise winner over Bernie Sanders; however, the win was slight, with Buttigieg taking 26.2% of the vote against Sanders 26.1%. Also, last week saw President Trump’s approval rating rise to 49%, the highest since he took office.
Asian equities were mixed last week. Chinese markets re-opened after the extended New Year holiday and played some catch up. PBOC initiatives and the reduction in tariffs on US goods to help fight the effects of the coronavirus outbreak, and helped support equities. In terms of sectors, health care stocks remained strong amidst the continuing spread of the virus. The energy sector was the relative underperformer in the region, with oil prices weak once again.
Australian equities underperformed broader Asian markets with Reserve Bank of Australia (RBA) Governor Philip Lowe saying that he hoped interest rates would remain unchanged over the year. (The current central bank rate is 0.75%.)
Ultimately, this meant that with very little likelihood of a rate hike, the probability of a rate cut was reduced. Lowe noted that the risks of a rate cut “have slightly tilted to outweigh the benefits”. This also came amidst a downgrade from the RBA on the country’s GDP and inflation forecasts.
Key economic data
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 10 February 2020, 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.
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 the 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.