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 more constructive for European markets (with a gain of 6% for the STOXX Europe 600), as European equities tracked gains in the United States and Asia. Whilst the US bailout package was the catalyst for the strength, it did feel like a short squeeze/pain trade drove the move higher earlier in the week. In addition, the systematic selling that we saw prior has abated.
As the week progressed, markets did feel a little more orderly and volumes were lower. Greenshoots in China also helped sentiment, as trackers of aggregate economic and virus-exposed consumer activity in China continued to improve. There is also evidence that lockdowns are working, with various news outlets reporting a reduction in the day-on-day increase in COVID-19 cases in Europe, notably Italy.
Overall, however, the picture remains fairly bleak with regards to COVID-19 newsflow and it’s unlikely normality will return in Europe for some time. Even if lockdowns are lifted in coming months, it is hard to see consumer behaviour quickly returning to previous habits, unless there are sudden advancements in testing for antibodies or vaccinations. However, any meaningful positive news on improving rates of infection/deaths would support investor sentiment.
Systematic selling: A question we have considered in recent weeks is how much selling pressure remains.
Quarter-end rebalancing: Europe is trading lower as at 30 March on low volumes with no new positive catalysts, but with just one more trading day left in the quarter, much has been made this week of the potential for pension-fund demand for equities into quarter-end. Given the dramatic declines in equity markets, many balanced pension portfolios are left skewed to bonds, so they will likely need to add to equities if they want to remain balanced per their mandates. Some observers suggest there will be a US$255 billion rebalance, US$190 billion of which could go into equities.
Sign of hope in Italy and the steepening Spanish curve: Whilst there had been reports from Italian regions that they had seen the number of cases slowing, on Friday there were news reports that the previous 24 hours had been the deadliest yet (with 969 deaths), which hit sentiment. Over the weekend, new cases did decline for two days running, but we must continue to monitor the situation.
Last week, we saw attention turn to Spain, where there has been a dramatic steepening of the death toll curve. It was only a couple of weeks ago that Prime Minister Pedro Sanchez was encouraging the Spanish people to join together in a mass demonstration for International Women’s Day, a calling which saw as many as 120,000 take to the streets of Madrid. Spanish deaths now approach 6,500, making it the second most-affected country by fatalities globally. On 27 March, Health Minister Salvador Illa said Spain had “not reached the peak yet” and on 29 March, we saw Spain’s deadliest day so far.Health care systems in both Italy and Spain are being stretched to near breaking point, with an alarming number of medical workers infected. Both Italy and Spain are struggling for ways to tackle the crisis, with Europe split along economic fault lines.
Balance-sheet scrutiny: Whilst single-stock news had been getting lost within the bigger picture, focus on balance sheet is a big theme. Friday saw an example of the stress balance sheets are under as Volkswagen said that the production halt on both sides of the Atlantic currently costs EUR€2 billion a week. It is notable that we have already seen a number of UK companies coming to the market to shore up their balance sheets and raise capital. We are seeing some tangible indications of the pain smaller companies in particular are feeling already, and likely a sign of things to come.
In this context, dividends are being slashed across the board. In addition, the EU Banks Sector Index was down 6.5% on Friday after the Financial Times reported that European Banking Federation backs suspension of dividends and buybacks for banks in fiscal year 2020. We’ve also heard anecdotal evidence that some investment managers are themselves encouraging companies to cut dividends, with those holders not focused on income strategies preferring that companies preserve capital to have a better chance of survival.
No doubt, dividend payments as well as buybacks will become politicized going forward as companies benefit from bailouts, etc.
Summary of where we are in the United Kingdom: On 27 March, we heard the latest update from the UK Chancellor on capital that would be made available for self-employed UK workers. Also, whilst the United States recently reported new jobless claims, we also note there are reports of some 500,000 claimants for social benefits in the United Kingdom in the last 10 days, a remarkable increase.
UK Prime Minister Boris Johnson has confirmed he has tested positive for the coronavirus and is suffering from mild symptoms. UK Health Secretary Matt Hancock has also tested positive and Chief Medical Officer Chris Witty is showing symptoms. So, the main figureheads of the UK’s effort to combat the virus are now infected. It seems inevitable other members of the government will test positive in the coming weeks. This will be a test of the government’s efforts to navigate the coming weeks as the situation escalates in the United Kingdom.
Over the weekend, the government’s leading epidemiology advisor warned that Britain must remain in full lockdown until June if it is to avoid the worst effects of the coronavirus.
Keep an eye on crude oil: One more thing to be aware of: oil prices may come under renewed pressure this week as the OPEC+ agreement to restrict oil production and support prices comes to an end and members are allowed to produce as much oil as they want. The end of the agreement comes as relations between Saudi Arabia and Russia fracture despite the United States’ attempts to mediate, given its significant shale industry and the exposure of the US banking system to oil.
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 30 March 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.