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.
Global equities continued to recover ground last week, with almost all indices and sectors trading higher. The MSCI World Index closed up 6.7%, its biggest weekly gain since November 2020. Regionally, the S&P 500 Index was up 5.9%, the STOXX Europe 600 Index was up 3.7%, whilst the MSCI Asia Pacific bounced back after some recent underperformance, up 8.4%.
Newsflow was very supportive for equity markets last week. The softer-than-expected US Consumer Price Index (CPI) print was the main headline-grabber, as hopes rose that tighter monetary policy conditions were bringing inflation under control. With that, rate-hike expectations fell globally, which in turn saw bond yields fall. Given bearish positioning, equities surged higher. Hopes of an easing in China’s COVID-19 policy also helped drive market moves last week. The US midterm election garnered a little market attention too—there is a strong correlation between a gridlocked Congress and positive market moves for the 12 months after mid-term elections. There was turmoil again in the crypto space following the bankruptcy of FTX.
Week in review
European equities were broadly higher last week, with the key drivers coming from outside the region. The STOXX Europe 600 Index was up 3.6%, its biggest weekly gain since mid-March. There were more positive headlines out of Ukraine. Russian forces were reportedly pulling back from the city of Kherson, despite the Kremlin’s claims that Kherson was still part of Russian territory. There were also reports that Russia and the United States will hold nuclear arms treaty talks in Cairo.
This morning it was reported that the European Union is “ready to go” with an effort to impose a price cap on Russian oil. European Commission President Ursula von der Leyen said: “It is important not only to dry out the war chest of Russia but also very important for many vulnerable countries to have an acceptable level of prices”.
Defence stocks struggled last week, with headlines suggesting a defence budget cut from the UK government not helping matters. Separately, oil and gas stocks suffered; year-to-date winners were sold and year-to-date underperformers rose last week, with some notable short covering aiding the rally. Growth stocks surged, with technology stocks strong outperformers last week. Retail, financial services and real estate stocks were also higher.
Despite the overall macro-driven strength last week, investors still need to focus on corporate earnings to see the effects flowing through. In Europe, 79% of the companies in the STOXX Europe 600 Index that were due to report earnings have now done so, and have beaten expectations across all four key metrics: sales surprise, sales growth, earnings surprise and earnings growth. No sector has been a notable best performer, although consumer discretionary stocks have been a clear underperformer, reflecting conditions in Europe’s cost-of-living crisis. Overall, earnings per share (EPS) growth has been higher than expected, with strength in energy stocks a big driver.
US equities were higher across the board last week, with a softer-than-expected CPI print driving hopes of a Federal Reserve (Fed) pivot. The S&P 500 Index was up 5.9%, its biggest weekly gain since late June. The CPI print on Thursday saw an increase of 0.4% month-over-month, which was a smaller gain than expected. This meant the annualised rate faded to 7.7% vs. 8.2% previously. With inflation now seemingly on a downward trajectory, interest rate-hike expectations fell sharply last week, with the Fed now expected to take a more gradual approach to managing rates. Fed officials noted that rates are still going up, but the ascent would be less steep.
The market is now expecting a terminal rate of 4.93% in June next year, down from highs of 5.1%. Fed Chair Jerome Powell pointed to the jobs market as justification for the recently more hawkish tones; however, that picture seems to be changing, as last week there were large layoffs announced across the tech sector.
The US dollar sold off on the back of the CPI print, closing the week lower. Also, to add to the “bad news is good news” theme, the University of Michigan consumer sentiment reading fell to 54.7 in November, the lowest level since July.
The US midterm elections were also a focus last week. It was not the so-called “red wave” for the Republican party, which the market had expected. The Democrats kept their majority in the Senate after they kept control of seats in Nevada and Arizona, two key battleground states for the Republicans. History has shown that the incumbent party typically loses support at the midterms, so last week was viewed as a strong showing for the Democrats. As alluded to above, historically, the US stock market has gained in the 12 months after midterm elections.
In terms of US earnings, 91.4% of the S&P 500’s market cap has reported, and earnings overall have surpassed estimates. Value stocks have been delivering stronger revenue and EPS growth than growth stocks in the third quarter. EPS growth excluding energy was much softer, coming in lower year-over-year.
Equities in Asia were strong last week, with the MSCI Asia Pacific Index closing up 8.38%.
Hong Kong’s Hang Seng was the outperformer, closing the week up 7.21%, mainly due to a strong rally on Friday after China eased COVID-19 quarantine restrictions amid a series of other relaxing measures.
Chinese real estate developers logged huge gains after China expanded a key financing support program designed for private firms, including real estate companies. Short covering and improving sentiment following changes to its zero-COVID policy and supportive measures for the battered property sector sent the stocks rallying into the weekend. In addition, news that US President Joe Biden would be meeting with China’s President Xi Jinping helped risk sentiment. In a meeting expected to be held on Tuesday, the two presidents are likely to discuss issues including Taiwan, Ukraine and North Korea, and establish red lines between the two rivals.
Japan’s Nikkei Index closed the week up 3.91%. The Bank of Japan (BoJ) said it would retain its ultra-loose monetary policy to underpin the fragile economic recovery. The yield on the 10-year Japanese government bond fell to 0.23% from 0.25%, while the yen strengthened versus the US dollar. The BoJ suggested that its interventions in the currency markets had worked. .
After a late Friday rally, Mainland China’s Shanghai Composite Index closed the week up 0.54%, underperforming other markets in the region due to concerns about new signs of economic fragility and increasing COVID-19 cases. The number of daily cases moved above 10,000 for the first time in over a year, threatening further lockdowns and weighing on sentiment for much of the week.
Yet, a relaxation in China’s strict zero-COVID policy seemed to have aided a market rally on Friday. Reports had surfaced over the previous week that the government was preparing to ease travel restrictions and other measures following the recent reelection of President Xi Jinping. Although Chinese officials stated that the policy remained firmly in place, on Friday afternoon, the government announced reductions in the mandatory quarantine time for in-bound travelers as well as testing requirements.
Last week’s economic reports were limited but demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below expectations and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.
The G20 summit in Bali will be a key focus for markets this week. Leaders will meet on Tuesday and Wednesday. Geopolitical tensions, the war in Ukraine and inflation levels are expected to be the hot topics at the summit. Outside of that, inflation prints in Europe throughout the week will be closely watched.
Monday 14 November
UK House Prices
Eurozone, German, France, Italy, Spain, UK Bloomberg Economic Survey
Eurozone Industrial Production
Tuesday 15 November
UK employment data
German ZEW Survey
Eurozone trade balance; employment; gross domestic product
Wednesday 16 November
UK CPI; RPI; Producer Price Index (PPI)
Thursday 17 November
Eurozone car registrations
Italy trade balance
Friday 18 November
UK Consumer Confidence; Retail Sales
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