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Notes from the Trading Desk – Franklin Templeton

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.

The Digest

 Last week was understandably jittery for global equity markets as the coronavirus dominated investor focus. Markets were volatile around headlines coming out of China, and overall indices trended lower.

Concern over Coronavirus Continues to Dominate

As the coronavirus continued to spread, market focus was squarely on the situation in China. The latest figures show total cases at 17,205, with 361 deaths and 2,296 severe cases. Last week, the World Health Organization (WHO) declared coronavirus a public health emergency, reinforcing the severity of the situation.

Market Reaction: Investor confidence was certainly rattled, especially in Asia where Hong Kong’s Hang Seng Index, Japan’s Nikkei Index and South Korea’s Kospi Index all took a tumble. Mainland Chinese markets were closed all last week, so, all eyes were on Chinese equity markets as they reopened on Monday. The losses were significant with Shanghai’s market taking a downward fall, although the extent of the declines was limited as over 85% of equities were suspended limit down

The Chinese authorities announced a raft of measures to shore up markets. These included a net US$21.7b injection to money markets today, according to Bloomberg calculations based on a statement on Sunday. The total injection announced was 1.2 trillion yuan (US$171bn), the largest single-day addition of its kind in data going back to 2004. However, the net effect is much lower as there are more than 1 trillion yuan of short-term funds scheduled to mature on Monday.

In addition, there was a 10-basis point (bps) cut to the Reverse Repo Rate and measures announced to support virus-impacted companies. The Financial Times also reported that the Chinese regulator was requesting fund managers to limit net daily sales of large-cap stocks to CNY 100m and small-cap stocks to CNY 10m.

In reality, it will take a couple of days for Chinese markets to settle, having been closed for a full week in such dramatic circumstances. Although China was weak on Monday, 3rd of February, other markets globally took this in stride, as Europe’s market was flat, and Hong Kong was up slightly. Furthermore, it’s important to keep the moves we are seeing in longer-term context. The S&P 500 Index was only down slightly for the month of January, so, not too dramatic so for.

Longer-term impact: We are still unsure of the full impact on the global economy as it’s too soon to really understand, but that hasn’t stopped a lot of head-scratching  regarding the potential implications of this and the sectors most exposed. In Europe, the sectors heavily impacted are those with significant Chinese exposure such as luxury, technology and autos. In addition, energy and basic resources have been hit hard.

In looking to understand the impact, many have used the SARS outbreak in 2002 as a comparison. Some observers have highlighted the two situations aren’t “apples with apples” comparison, as the economic environment has changed so much since then. Not only is China a far larger component of the global economy, but also Chinese equities valuations and weightings in indices are completely different. The impact has the potential to be far greater given China’s economic growth.

Last Week



European markets were broadly lower last week on the back of increased investor caution as the coronavirus continued to spread. Germany’s DAX Index was down given the weakness in autos and transportation, given travel concerns. Meanwhile, there was relative outperformance in Spain, given the heavier index weightings in the utilities sector. In terms of sector moves, it was the utilities which outperformed, although down 0.6% on the week. Technology stocks lagged in Europe, with growth sectors under pressure amidst continued risk-off sentiment. Oil and gas stocks as well as basic resources were also particularly weak with growth in China a major concern.

Utilities were a significant outperformer in Europe through the month of January, with real estate stocks following. This strength is further compounded when we compare it to the broader move in the Eurostoxx 600 Index, which was down on the month. The performance divergence came in a month, which saw broad risk-off sentiment return amidst fears over global growth and at the same time,  continued outperformance by momentum over value.

Some of the moves in the utilities sector through January have been quite remarkable. There is also the environmental, social and governance (ESG) angle to the outperformance with more and more investors factoring in strong commitments to cutting carbon emissions when building their portfolios. This notable outperformance in the sector has certainly been an interesting dynamic through January, and it will be interesting if these moves have set the tone for what could be a particularly strong year for the sector.

Elsewhere, after all the excitement last week over a potential rate cut from the Bank of England (BoE), it was slightly disappointing, and no interest-rate cut was announced. Rates remained on hold and the vote was hawkish given economists’ expectations at 7-2. This also represented no shift from the previous vote. The more hawkish update saw the pound gain some traction, breaking back through US$1.31 and continuing the move higher on Friday. Forward guidance was slightly skewed to the dovish side, but it was the vote itself that drew attention. Gilts underperformed bunds and US Treasuries in response, whilst the exporter-heavy FTSE 100 Index declined.

Finally, last Friday, 31st January, the United Kingdom left the European Union (EU), although little changes now as the United Kingdom enters a transition period that runs until the end of this year. Focus is now turning to the trade talks between the United Kingdom and the EU, with rhetoric from both sides heating up already. As we go through a tough negotiation period, we can expect investors to be back in a “wait-and-see” mode.


United States

US equities were worse off last week, with focus firmly on macro factors despite it being the busiest week for earnings. The outbreak of the new strain of the coronavirus in Asia has put a pause on the bull market in the United States. Sector moves were broadly in line with what we saw in Europe, with utilities outperforming, whilst energy and materials lagged given fears over the effect of the virus upon Chinese growth. Health care stocks were also weaker, with Democratic Presidential Candidate Bernie Sanders polling well in the state of Iowa, where the first primary race is being held. Earnings appear to better than expected so far, with some 61% of the total market capitalisation of the S&P 500 having reported by the end of last week.

The Federal Reserve (Fed) had its monetary policy meeting last week, leaving its benchmark rate unchanged at 1.50%-1.75% and citing that monetary policy is “likely to remain appropriate”. This is likely to disappoint US President Donald Trump, who said earlier in the week that the Fed should “get smart and lower the rate to make our interest competitive with other countries”.

Despite that, given Fed Chair Jerome Powell’s comments around lingering risks to the global economy as well as the difficulty they are having in sustaining inflation above 2%, the central bank appears more likely to cut than raise interest rates. In the policy statement, there was one small change to language where the committee noted they would like to see inflation “return” to the target 2% rather than “near” that figure. This seemed to suggest a firmer commitment to have inflation back above that level long term.

Also, as focus builds towards the US presidential election at the end of this year, eyes will be on Iowa at the start of this week where caucuses will be held as the state will vote for its preferred Democratic candidate. The race is between former Vice President Joe Biden, who is the national front-runner, and Bernie Sanders, who has seen a recent rise in support and is now favourite in Iowa.



As we have discussed, the coronavirus was the main focus for Asian equities. South Korean equities were further weighed on by weaker earnings from index heavyweight Samsung, whilst in Japan, retailers were hit hard on coronavirus concerns.

Week Ahead


  • US Iowa caucuses on Monday with focus on Democratic party leadership race.
  • US President Trump’s State of the Union Address on Tuesday.
  • UK/EU: Focus now turns to trade talks, with rhetoric heating up from both sides.

Key economic data

  • Monday: US ISM Manufacturing Survey; Asia Caixin Manufacturing PMI.
  • Tuesday: US Factory Orders and Durable Goods Orders; Italian CPI.
  • Wednesday: US ISM Non-manufacturing and Trade Balance on Wednesday; Eurozone Retail Sales; Asia Caixin Composite and Services PMI.
  • Thursday: German Factory Orders.
  • Friday: US Non-farm payrolls; German and French Industrial Production; German Trade Balance; Chinese Trade Balance and Foreign Reserves.

Monetary Policy

  • Reserve Bank of Australia meeting on Tuesday; European Central Bank’s Christine Lagarde and François Villeroy de Galhau speak on Thursday.



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 3 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.

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