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 were higher last week, with the MSCI Global Index finishing the week up 1.7%, while the S&P 5000 Index was up 1.3%, the STOXX Europe 600 Index was up 1.5% and the MSCI Asia Pacific Index was up 0.9%.
Newsflow through the week was relatively quiet. The Brexit saga rumbles on in the background, but investors now appear numb to the headlines, although the extension on trade talks did raise hopes that a deal may be close. There was also focus on whether US Congress would finalise a stimulus package. Positive Chinese macro data as well as a surprisingly strong European Purchasing Managers Index (PMI) for December supported a rally in the cyclicals through the week.
There was a clear risk-on theme when we look at global fund flows, with investors flocking to equities. Sentiment was bullish in the latest Bank of America Merrill Lynch (BAML) Fund Managers’ Survey; funds were now underweight cash for the first time since May 2013—cash levels at 4%. In terms of equity allocations, emerging markets allocations were at their highest since November 2010, but investors were still overweight in the United States and Europe. Allocations to consumer discretionary, industrials (highest since April 2014) and bank stocks increased, but technology still remained the largest overweight.
COVID-19 cases began to pick up again around Europe, causing governments to re-tighten restrictions. This comes ahead of the holiday period—many governments had previously announced a relaxation in rules allowing families to mix in ways they haven’t generally been allowed to during the pandemic. This relaxation had added to fears that we may be due a further spike in infection rates heading into the new year.
Over the weekend, the United Kingdom and devolved governments announced a change to planned rules for Christmas. Initially, the plan was to allow residents five days over Christmas (23-27 December inclusive) to form a bubble with family members to allow people to spend time within the same households. That has now been changed to Christmas Day only. The new restrictions come following an uptick in cases in the Southeast of England and the emergence of a new strain of coronavirus which is thought to be 70% more infectious than the original variant.
UK Prime Minister Boris Johnson said the new strain is “out of control’. It is not yet clear whether the vaccinations developed for COVID-19 will work against the new strain. A number of European countries have closed their borders to anyone travelling from the United Kingdom. Germany, France, Italy and the Netherlands, among others, have announced new restrictions in the last couple of days.
Sentiment in markets took a hit at the start of this week. The STOXX Europe 600 Index weakened and UK Sterling lost all of last week’s gains. Value stocks, which had staged a decent recovery since the start of November, weakened. The three worst-performing sectors in Europe year-to-date were the laggards again in early trading as we kicked off the week: oil and gas, banks and travel and leisure. Airline stocks in Europe are particularly weak. The outperforming sectors were health care, chemicals and technology.
Last week saw a glut of hyperbole regarding the Brexit talks between the United Kingdom and European Union (EU), but little in the way of concrete developments. After agreeing to continue to talks for another week, the key sticking points remain unchanged. On the issue of fishing, it seems the EU had asked for a fisheries transition period of eight years, while the United Kingdom had offered three years. Regarding fair competition for business, EU Chief Negotiator Michel Barnier suggested if the United Kingdom wants to diverge from EU regulations at any point, it needs to accept there would be implications for UK access to EU market in the future.
On Friday of last week, Barnier stated that the Brexit talks have reached the ‘moment of truth’ and this was the ‘last attempt to find an acceptable agreement’. Members of the European Parliament had been pushing for Sunday to be the deadline for agreeing to a deal that could then be ratified. However, that deadline has now come and gone, and we appear no further ahead in the quest for an agreement.
Through last week, the strong performance of UK assets suggested investor confidence that a deal would be reached. Sterling traded back towards levels last seen in 2018. However, nerves started to creep in on Friday, and the currency declined.
Trade talks will continue.
European equities finished higher amid a relatively quiet week, with the STOXX Europe 600 Index closing the week up 1.5%. Brexit as well as the better-than-expected PMIs were the focus for investors.
As the Chinese proxy in Europe, the German DAX Index outperformed, up 3.9%. Meanwhile, the UK FTSE 100 Index lagged, down 0.3%, weighed on by the stronger pound (up 2.2%). Momentum stocks outperformed vs. value. In terms of sectors, automobiles were helped by the better Chinese data, closing the week higher. Technology, insurance and basic resources were also strong. Oil and gas stocks lagged on the week, despite stronger oil prices.
The financials were in focus with the European authorities allowing limited dividend payments. Eurozone banks will face continued limits on capital return (as expected); the European Central Bank (ECB) published a statement urging eurozone banks to ‘exercise extreme prudence’ and ‘refrain’ from (or ‘limit’) buybacks/dividends until the end of the third quarter 2021. The strong suggestion that capital return would stay prohibited until the third quarter was a surprise (and mildly negative). The banks were one of last week’s underperformers.
US markets traded higher last week. The S&P 500 Index gained ground, led higher by momentum stocks. The ‘FAANGS’ were higher: Facebook, Amazon, Apple, Netflix and Alphabet. Despite a typically slow time of year, there was still plenty going on in the United States, with a Federal Reserve (Fed) meeting, ongoing stimulus talks, and COVID-19 concerns.
Looking at sector performance, information technology and consumer discretionary outperformed. The clear loser last week was the energy sector, as value names suffered from rotation into momentum.
Negotiations over a fiscal stimulus deal were a talking point for investors, and over the weekend Republicans and Democrats finally reached a deal. The nearly US$900 billion economic stimulus package includes more relief for small businesses and direct payments to American families suffering in the coronavirus pandemic. The legislative text was still being written, but the House is expected to vote on it Monday, followed by the Senate. By reaching this agreement, a US government shutdown was avoided as funding was scheduled to run out this weekend.
The Fed kept policy on hold and commentary was broadly in-line with expectations. The Committee adopted qualitative outcome-based guidance for their asset purchases, noting that it would maintain the current pace of quantitative easing (QE) until achieving ‘substantial further progress’ towards its dual mandate goals. The Fed refrained from adjusting the duration and pace of purchases.
The COVID-19 situation continues to remain grave, with cases and daily deaths still elevated and hospitalisation rates near record highs. However, there was positive news as the US Food and Drug Administration (FDA) approved a second vaccine, this one from Moderna.
Finally, following US automotive company Telsa’s meteoritic rise this year (+730%) it was added to the S&P 500 Index last Friday.
Equities in the APAC region were broadly higher last week, with mainland China the outperformer following some better data releases. Headlines that the likelihood of a China/EU investment agreement by year end helped sentiment , with Beijing making more generous market access offers in various sectors of the economy. China’s EU Ambassador Nicolas Chapuis said last week that the talks are in the ‘final stage’ and that a consensus had been reached on the so-called ‘level playing field’.
On the other hand, tensions between the United States and China remain high. Last week saw the United States put China’s largest chipmaker and drone maker on an export blacklist. The US Commerce Department blacklisted over 60 Chinese companies, citing national security and human rights violations. Over the weekend, Beijing threatened to impose countermeasures.
According to China’s Ministry of Commerce, the United States has ‘abused’ export controls to suppress enterprises, institutions and individuals of other countries. The United States has also continued to criticise the World Health Organization’s (WHO) probe into the origins of the COVID-19 pandemic. A WHO team is now set to travel to Wuhan in January in order to investigate the origins of the pandemic.
There was positive economic data from New Zealand—the economy accelerated out of its pandemic-related recession. Gross domestic product (GDP) grew 14% in the third quarter, with a strong resurgence in household spending driving the recovery. The second-quarter decline in GDP was also revised to be less severe (-11% vs. -12.2% prior). The record growth in the third quarter was attributed to New Zealand’s ‘go hard and early’ approach to COVID-19 restrictions. The picture is also looking brighter in Australia, with the government upgrading its economic and budget forecasts in order to reflect a speedier recovery than previously anticipated.
Despite the holiday season looming large, there are still a couple of major catalysts for the markets to watch: Brexit negotiations and the US fiscal developments. Both of these events could impact European markets, particularly with thinner volumes during the holiday period leaving the door open for greater volatility. Sadly, COVID-19 headlines will also continue. Macro data will be condensed into the first half of the week, with a lot of US data on 22/23 December. In Europe, the highlight is UK GDP on Tuesday.
Monday 21 December:
Data: Eurozone consumer confidence
Tuesday 22 December:
Data: US GDP, consumer confidence, existing home sales; UK GDP
Wednesday 23 December:
Data: US personal income, personal spending, new home sales, inflation, durable goods orders
Thursday 24 December:
Data: Japan unemployment rate
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