Franklin Templeton’s Notes from the Trading Desk offer a weekly overview of what our 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.
Markets were in a muted state for most of last week before being awoken on Friday morning by the rather sudden re-escalation in political tension between the United States and Iran. It was a holiday-shortened week with all major indices closed on Wednesday for New Year’s Day, and most in Europe closed or partially closed on Tuesday as well. In terms of moves, the S&P 500 Index and the Eurostoxx 600 ended down, whilst the MSCI Asia Pacific outperformed, up modestly.
Unites States/ Iran
What appeared to be a rather positive start in 2020 for global equity markets upon their return to trading after the New Year’s Day holiday break was reversed early on Friday with the news that the United States had killed the head of Iran’s elite Quds Forces, General Qassim Soleimani, via an airstrike in Baghdad. There were immediate fears of a rather extreme re-escalation in political tensions between the United States and Iran, with Supreme Leader Ali Khamenei warning of “severe retaliation”. President Donald Trump’s order to strike also received criticism in Washington, with US House Speaker Nancy Pelosi saying the action was taken without consulting Congress.
Trump tried to justify the move by tweeting on Saturday that Soleimani was a “terrorist leader” who “was already attacking our embassy and preparing for additional hits in other locations”. Despite this, the New York Times reported that two US officials had noted any evidence that further attacks were planned by Soleimani was “razor thin”.
Soleimani has had a fractious relationship with the United States for a number of decades, more recently as an unlikely bedfellow in the fight against Daesh. Critically, on Sunday, Iranian officials stated that they had officially pulled out of their 2015 commitments with regards to restrictions on their development of nuclear weapons.
Market reaction to the developments with Iran was risk-off, but also one of trepidation on Friday. Equities in Europe and the United States lost all of Thursday’s gains, with the Eurostoxx 600 Index closing the day down 0.3% whilst the S&P 500 Index later closed down 0.7% on the day. However, so-called “safe havens” were well-bid, with gains seen in gold, the Japanese yen and US Treasuries.
The starkest move was seen in the oil space, with West Texas Intermediate (WTI) and Brent crude oil both rallying more than 4% on Friday morning. As we saw in 2019, oil prices are always volatile around these types of events, with investors trying to establish what any rise in geopolitical tension does for supply out of the Middle East. Whilst the market may have sufficient reserves at present, we did see a tightening through the fourth quarter, meaning any supply shock is likely to have a more pronounced impact on inventories.
We also must consider the broader impact of an extensive and sustained rally in oil prices upon global economic growth.
The International Monetary Fund (IMF) predicts global gross domestic product (GDP) growth to recover this year to 3.4% from 3.0% last year (assuming Brent prices around $58 per barrel).Therefore, should the rally in oil prices be prolonged by a continuous heightening of geopolitical tension in the Middle East then we can expect the IMF to re-think its expectations. Currently, Brent is trading around the $69 level.
Therefore, from a market perspective, the impact of a rise in geopolitical tension is far-reaching and is looking increasingly likely to be a key focus for markets through the first quarter, with such forecasts possibly subject to early revisions.
Asian equities were helped through the latter part of last week with the news that the People’s Bank of China (PBOC) had cut the Reserve Requirement Ratio (RRR) by 50 basis points.In our view, this move should be of benefit to the economy, as it reduces the rate to which banks will lend money to businesses in the country. The head of the PBOC’s Statistics and Analysis Department did note that China’s RRR remained high compared to other global leaders and left them sufficient room to lower further should it be required. The change was expected, but the news nonetheless buoyed equities, with the Shanghai Composite up as much as 1.5% in the early session on Thursday.
It looks as if a new government is finally set to take office in Spain after acting leader Pedro Sanchez persuaded a Catalan separatist party, the ERC, to abstain from an important vote.
Despite a confidence vote over the weekend yielding no solution (Sanchez only received 166 of the 176 votes required, with 165 against and 18 abstentions), the follow-up vote on Tuesday—which is a binary “yes” or “no”—is likely to give Sanchez victory. It has been reported that in return for their abstention, Sanchez has promised to open up dialogue with Catalan parties regarding holding a citizens’ vote on secession.
Markets usually respond well to more certainty, but the increased probability of Catalan separation from Spain will undoubtedly spook investors. Also, the new government’s plan around corporate tax rates will likely be another concern to investors. Spain’s IBEX Index was down slightly on Friday, not helped by broader market moves.
We received some December economic data last week which garnered some investor attention. There was an improvement in the Chinese manufacturing Purchasing Managers’ Index (PMI) which came in at 50.2, slightly higher than what the market had been expecting. There was also a notable rise in new export orders to 50.3, vs. 48.8 expected.
Eurozone macro also improved, with manufacturing PMIs revised higher. German and French consumer price indices were better than expected too, showing stronger-than-expected inflation of +1.5% vs. +1.2% previously in Germany, and +1.6% vs. +1.2% previously in France.
UK macro data was soft, however, with both manufacturing and construction PMIs missing estimates. The report showed the UK manufacturing and construction PMIs lower than anticipated (coming in at 47.5 and 44.4, respectively) as Brexit uncertainty continued to bite through December.
- Clearly, any developments in regard to tensions between the United States and Iran will be in focus following Trump’s weekend reiteration of his threat of “major retaliation” against Iran if they “do anything”.
- Tuesday looks to be a busy day on the European political front, as UK Parliament returns from recess and begins three days of debate on Prime Minister Boris Johnson’s Brexit deal. The bill is expected to pass through the House of Commons to the House of Lords on Thursday.
- Also on Tuesday, the UK’s opposition Labour Party’s executive committee will meet and set a timeline for their leadership contest to find a successor to Jeremy Corbyn, whilst on the continent Italian Prime Minister Giuseppe Conte will meet his coalition partners to smooth tensions over reforming Italy’s byzantine judicial system.
The key release this week will likely be US monthly employment report on Friday, but we also get the following, with investors looking for an improvement in euro-area macro (releases in focus highlighted):
- US: Final PMI (Mon); Non-mfg. ISM, factory orders, trade, durable & cap goods (Tue); ADP employment (Wed).
- Europe: Euro area & UK final PMIs (Mon); Euro area retail sales & CPI, Italy CPI (Tue); German factory orders, euro area & France consumer confidence (Wed); German industrial production & exports (Thurs); France, Italy & UK industrial production, UK GDP & trade (Fri).
- Asia: Japan & China Caixin PMI (Mon); China foreign reserves (Tue); Japan cons. confidence (Wed); China PPI & CPI (Thur); China aggregate financing, new loans & M2 money supply (10-15 Jan).
- We hear from a number of US Federal Reserve speakers throughout the week, but it is fairly quiet on the central bank front outside of that.
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 7 January 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.