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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 our professional traders and analysts are watching in the markets. As part of Templeton Global Equity Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, 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 equity markets drifted lower as concerns over Chinese growth, hawkish central banks and elevated bond yields weighed on sentiment. It was a subdued first half of the week, thanks to the Independence Day holiday in the United States, with low trading volumes globally. European equities saw the largest declines; the STOXX Europe 600 Index suffered its worst weekly performance since March, down 3.1%, while the S&P 500 Index declined 1.2%, the MSCI Asia Pacific Index declined 1%, and the MSCI World Index declined 1.4%.

Week in review

Europe

Last week was tough for European equities. The move lower started mid-week, when Chinese Purchasing Managers Index (PMI) data came in weaker than expected, reminding investors of the challenges that European companies exposed to China face. Moving into the end of the week, markets slid further on hawkish minutes from the latest Federal Reserve (Fed) meeting and stronger US private sector employment data from ADP on Thursday.

Looking at country performance, Italian equities held up better than most last week, with the country’s benchmark index hitting 15-year highs at the start of the week, but ultimately ending down 1.6%. Prime Minister Giorgia Meloni’s government has steered a market-friendly path since coming to power last year and the Italian banks have outperformed accordingly. In terms of losers, France’s CAC 40 Index underperformed, down 3.9%, as civil unrest weighed on sentiment in the country. The UK FTSE 100 Index also lagged, down 3.6% (falling to year-to-date lows), as UK terminal interest-rate expectations moved higher.

Although there wasn’t a great deal of new news regarding the Bank of England last week, UK gilt yields continue to move wider, with the 10-year rate reaching as high as 4.7% last week, levels last seen in 2008. Last week, we also had a £4 billion two-year gilt auction selling at the highest yield since 2007, reaching c. 5.67%. All this noise certainly weighed on equity market sentiment.

In Germany, attention returned to the falling Rhine water level as the dry summer season returns. The water marker at Kaub fell to its lowest level (for this time of the year) in at least three decades, which could impact the transport of goods and negatively impact economic activity overall.

United States

The S&P 500 Index declined 1.2% in a holiday-shortened week, with similar declines across other major US indices.

In terms of catalysts, Thursday’s strong ADP employment data seem to spook investors, with 497,000 jobs added in June, much higher than anticipated. Markets sold off sharply after the release of the data, as it seemed to support the recent more hawkish narrative from the Fed.

The minutes from the Fed’s June meeting gave the message that further interest-rate hikes are to come, with the minutes stating “almost all” officials said “additional increases” in rates would be appropriate. Fed officials reiterated that no rate cuts were expected until 2024, with core inflation still a long way from the central bank’s 2% target.

With that backdrop, attention was on Friday’s June Employment Report. The data showed 209,000 jobs added, which was lower than anticipated. However, the ongoing strength in average hourly earnings (+4.4%, steady with the prior month) reinforced the notion that the labour market remains robust. With that, equity market moves on Friday were fairly benign, with the S&P 500 Index only down 0.3%.

US Treasury yields were also in focus. On Thursday, the 10-year yield exceeded 4% again for the first time since March amidst the surprisingly strong employment data.

This week US earnings season starts, with several banks reporting. Focus will be on loan default data, given the rising cost of debt. Recent data shows filings for bankruptcies rising, so something to keep an eye on.

Bloomberg highlighted that Wall Street strategists have the most bearish second-half outlook ever on the S&P 500. The average of the strategists’ outlook over the next six months is for an 8% decline.

Asia

Asian markets followed global markets and trended lower last week, with the MSCI Asia Pacific Index down 1%. In a departure from recent form, the Shanghai Index outperformed, down just 0.2%, while Hong Kong’s benchmark index declined 2.9%, and Japan’s Nikkei was down 2.4%.

In China, the focus was on the visit from US Treasury Secretary Janet Yellen. She held two days of talks with Chinese counterparts, where she aims to stress the United States is looking to secure its national security with recent curbs around sharing of tech information, but not to secure “economic advantage” over China. She stated: “No one visit will solve our challenges overnight. But I expect that this trip will help build a resilient and productive channel of communication with China’s new economic team.”

Chinese macro data were uninspiring, with the Caixin PMI Services Index declining to 53.9 from 57.1 in May, marking its weakest reading since January and missing consensus forecast of 56.2. This morning, China Consumer Price Index (CPI) Inflation data came in at 0%.

It was a notable week for Asian technology stocks, as Chinese authorities announced large fines on two Chinese tech giants. Markets are hoping this action signals an end to a lengthy government probe.

Japanese equities saw some profit taking last week with the Nikkei down 2.4%. With the index up 23% year-to-date, it isn’t too surprising to see some gains fade with global markets also pulling back last week.

The week ahead

There are some interesting data points to focus on this week. The US CPI data, released on Wednesday, stands out as a potential market-moving event. In addition, second-quarter earnings season kicks off in the United States with a number of US banks reporting on Friday.

In the United Kingdom, Chancellor Jeremy Hunt makes his Mansion House speech, where he will outline plans on new capital market rules. Within this, there is an expectation he will take measures to encourage UK pensions to deploy more funds to UK capital markets.

Monday, 10 July

  • US New York Fed Consumer Expectations
  • US Consumer Credit

Tuesday, 11 July

  • Germany CPI
  • UK ILO Unemployment Rate and Claimant Count
  • Italy Industrial Production
  • Japan PPI

Wednesday, 12 July

  • Spain CPI
  • US CPI
  • US Beige Book
  • Interest-rate decisions in Canada and New Zealand

Thursday, 13 July

  • UK Manufacturing & Industrial Production Monthly gross domestic product (GDP)
  • France CPI
  • Eurozone Industrial Production
  • US Jobless Claims and Core Producer Price Index (PPI)
  • European Central Bank meeting minutes
  • Chinese trade data

Friday, 14 July

  • G20 finance ministers and central bank governors meeting
  • Japanese Industrial Production
  • Eurozone Trade Balance
  • US import prices
  • US University of Michigan sentiment survey
  • US earnings season begins: Wells/JPM/Citi/Blackrock second quarter due out

 


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What Are the Risks?

All investments involve risks, including the 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.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 3rd July 2023, 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.

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