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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.

Equities ground gradually higher through last week, with focus shifting to the start of the new corporate earnings reporting season amidst geopolitical tensions. Renewed hostilities between the United States and Iran weighed on equities at the start of the week as investors awaited the next move by either side.

It was a tough week for UK retailers on quarterly reporting, causing the FTSE 100 Index to underperform other major benchmarks, alongside some rather downbeat comments from Bank of England members on the UK economy.

The Digest

US/Iran and Oil

The potential re-escalation in tensions between the United States and Iran remained an overhang at the start of last week. Iran’s Supreme Leader Ali Khamenei warned of “severe retaliation” after the US killed General Qassim Soleimani via an airstrike in Baghdad the previous Thursday. US President Donald Trump warned that if Iran strikes back, the US would return fire “very fast and very hard”.

On Sunday, 4th of January, Iran announced it had officially pulled out of their 2015 nuclear commitments, a key point of contention in recent times with Iran subject to renewed economic sanctions of late.

Early Wednesday of last week, military retaliation from Iran came in the form of missile strikes on a US air base in Iraq. Reports suggest the US suffered no casualties and limited damage despite the bombardment. Subsequently, both sides attempted to play the conflict down.

Iran’s Foreign Minister Javad Zarif said Iran did “not seek escalation” and the attacks were self-defence, whilst Trump later noted that “Iran appears to be standing down”.

When we look at oil prices through the week, the impact of geopolitical events such as this appears rather stark. Early Wednesday morning, oil prices were up more than 8% year-to-date. Any prospect that oil supplies will tighten further as a result of either dwindling Iranian exports or because the unrest spreads further throughout the Middle East will likely send oil prices higher. The impact of existing US sanctions on Iranian oil exports is clear; according to the International Monetary Fund (IMF), in 2017, Iran’s crude oil exports were 2.1 million barrels per day, while in 2018, that figure was 1.8 million barrels per day. 2019’s figure is forecast to be around 600,000 barrels per day.

Nonetheless, last week’s rather sudden de-escalation in the wake of the missile attacks was welcome news broadly for investors. Global equities and bond yields rallied into the end of last week as the imminent threat of further military action started to dissipate. Traditional safe havens weakened, with gold, the Swiss franc and the Japanese yen coming off from early highs throughout the day on Wednesday.

Finally, as a result, oil prices declined sharply with Brent crude oil closing at US$65.44 after opening above US$71 on Wednesday, 8th January. This represented the steepest weekly loss for oil prices since July and the first since November.

UK Assets Suffer New Year Hangover

It has been an interesting start to 2020 for UK assets. After the  surge of positivity (and subsequent inflows) in the second half of 2019 following Prime Minister Boris Johnson’s agreement to a new deal with the European Union (EU) and comprehensive election victory, 2020 has been somewhat sobering. A number of profit warnings from UK domestic companies have weighed on market sentiment, and commentary from the Bank of England has been surprisingly dovish, raising concerns over their outlook for the UK economy.

Looking at the corporate warnings first, the retailers have been particularly hard hit. Common sources of pain were heavy discounting, reduced footfall due to election uncertainty, and weaker consumer confidence.

In terms of central bank chatter, Bank of England Governor Mark Carney surprised market observers with his statement that the Monetary Policy Committee (MPC) is debating stimulus and that a post-election rebound is not assured. In addition, he stated “if evidence builds that the weakness in activity could persist”, there would be a case for cutting rates promptly.

On Friday, Bank of England member Silvana Tenreyro stated she would consider voting for rate cuts in the next few months if sluggish global growth and uncertainty surrounding Brexit persist.

This theme was supplemented further over the weekend after another Bank of England member, Gertjan Vlieghe, echoed Tenreyro’s sentiment. Vlieghe is seen as a fairly influential MPC member with his analysis, proving effective in leading rates one way or another in the past. The probability of an interest-rate cut at the 31st January meeting has risen to 49% (as of Monday 13th January) from 25% on Friday. The current policy rate stands at 0.75%.

Finally, last week has been something of a reality check with regards to Brexit, as attention now turns to the upcoming trade negotiations with the EU.

On the 31st January, the United Kingdom will enter a transition period which is scheduled to end on 31st December 2020. Before that deadline, the UK needs to agree to a new trade deal with the EU or face a hard Brexit at the end of the year. We have seen both Michel Barnier, the European Commission’s Head of Task Force Relations with the UK, and the new European Commission President Ursula von der Leyen take a firm stance on the upcoming negotiations. Barnier said: “Nobody should doubt the determination of the commission, and my determination, to continue to defend the interests of the EU27, and to defend the integrity of the single market”.

Last Week


The Eurostoxx 600 Index saw a fairly subdued move last week, trading +0.2%. However, it was more interesting to see some divergence amongst European indices, with Germany’s DAX Index outperforming, whilst the UK lagged.

Technology and autos took the lead in Germany, whilst UK equities faced a number of headwinds last week that particularly weighed on the domestic-focused names.

We did see a few interesting developments in European politics last week. In Spain, the new coalition government made up of the Socialist PSOE and Far-left Podemos was sworn in. Investors will be watching closely for the path the new government will take -how radical their fiscal policies actually be, and how they approach the Catalan issue. This scrutiny will be greater given Spanish equities have lagged broader European equities for some time.

In France, in an attempt to end the widespread strikes that have been ongoing for the past month, President Emmanuel Macron has offered a compromise on his pension reforms – he has offered to drop the requirement to raise the French retirement age to 64 (from 62). At this point, there has been a mixed reaction from the trade unions, with a clearer picture likely to develop this week.

In terms of macro data, the German data points gave us a mixed picture as November factory orders were disappointing, but industrial production was stronger than expected. The latest European consumer price index (CPI) reading was in line with expectations at 1.3% (a six-month high), although still well below the European Central Bank’s (ECB’s) target of 2%.

United States

US equities closed broadly higher after fluctuating throughout the week amid a rising then subsequent calming of global tensions. The large-cap S&P 500 Index was up last week, whilst the small-cap Russell 2000 lagged. Towards the end of the week, a de-escalation of tensions in the Middle East alongside hopes that a “phase one” trade deal will be signed between the United States and China this week lifted sentiment a bit. We saw a statement from China’s Ministry of Commerce which gave the first official confirmation of a signing data of 13th-15th of January, which Trump had previously tweeted.

Looking at sectors, technology extended its recent outperformance, whilst energy unsurprisingly underperformed amid the move in crude oil.

The key US data point last week was Friday’s December nonfarm payrolls, which came in weaker than expected. There was also a small downward revision to the prior month’s reading. It’s worth caveating that there was probably some noise around this number, with the 2019 holiday alignment leading to some seasonal distortion. The number doesn’t likely change the Federal Reserve’s (Fed’s) narrative, with economic resilience still a theme for the United States as other data points remained solid.

Focus will now fall on earnings season as the US banks kick things off this week.

Asia and Pacific (APAC)

Markets in the APAC region were higher across the board last week, with the de-escalation in global tensions and optimism over this week’s potential “phase one” deal signing supportive of sentiment (as discussed in our US section). Chinese equities saw their 6th straight week of gains, with both the Shanghai Composite and Hang Seng benefitting from seasonal strength associated with the week-long Lunar New Year holiday (which begins on January 24th). This period has historically been strong for mainland stocks.

Reports that the Bank of Japan is likely to revise their fiscal year economic forecasts higher from April helped buoy Japanese equities. This revision will likely be done to reflect an expected boost from Prime Minister Shinzō Abe’s latest stimulus package. The yen declined with Japan’s final December Purchasing Managers Index (PMI) number revised lower, but the currency move also played into equity market strength.

Meanwhile, Australian equities outperformed  hitting record highs on Friday despite bushfires that continue to rage on. South Korean equities also put in a strong performance, led by bellwether Samsung, which released impressive preliminary fourth-quarter earnings numbers.

Finally, Taiwan re-elected Tsai Ing-Wen as president over the weekend. Tsai had been leading in the polls, with her firm stance against China boosting her popularity following the unrest in Hong Kong. The result saw Taiwan’s benchmark equity index nearly reach 1990s highs in early trade this week. Beijing has previously to engage with Tsai’s government and continues to push for the one country, two systems model for the “unification” of Taiwan.

Week Ahead


  • The US and China are set to sign their “phase one” trade deal on Wednesday, which will clearly be a major market focus.
  • With heightened tensions in the Middle East, geopolitics will remain a focus.
  • We can also expect some headlines as the EU’s new Trade Chief Phil Hogan meets with US Trade Representative Robert Lighthizer in Washington on Tuesday.


So far in early trading this week, UK data has been mixed. November industrial production disappointed, down 1.2% on the month, whilst gross domestic product (GDP) data was better than expected, rising 10 basis points in September to November.

  • US: December monthly budget on Monday; CPI on Tuesday; manufacturing survey and PPI on Wednesday; Retail sales on Thursday; Housing starts, Industrial production and Job Openings and Labor Turnover Survey (JOLTS) data on Friday. Also, fourth-quarter earnings season kicks off with the banks on Tuesday.
  • Europe: Economic survey’s from across the eurozone on Monday; German GDP, UK CPI and producer price index (PPI) and Eurozone industrial production on Wednesday; eurozone car registrations on Thursday; and UK retail sales and eurozone CPI on Friday.
  • Asia: Chinese trade balance on Tuesday; Chinese GDP, retail sales and industrial production on Friday.

Monetary Policy

  • US Fed releases its Beige Book on Wednesday.
  • ECB meeting minutes on Thursday.



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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 13 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. 

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