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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

It was a quieter week for global markets, with trading volumes still depressed following the Easter holidays. In a quiet environment, the path of least resistance was higher and indices grinded higher thanks to some benign macro data. Market focus remained on central bank policy, with expectations still for a Federal Reserve (Fed) interest rate hike of 25 basis points (bps) in May. On the week, the MSCI World Index rose 1.3%, the S&P 500 rose 0.8%, the STOXX Europe 600 Index rose 1.7% and the MSCI Asia Pacific Index rose 1.2%.

With volumes so low in the last two weeks, it is hard to say how much conviction there is behind these moves. We will get a better sense of investor sentiment this week, with a heavy calendar of corporate earnings reports as the holiday season concludes.

Week in review

United States

US markets were higher last week, with the S&P 500 Index having tested and bounced off the key technical level of 4100 a couple of times in the last two weeks. The Dow Jones Industrial Average and Russell 2000 Index also performed well, up 1.2% and 1.5% respectively, while the Nasdaq 100 lagged, up 0.1%.

Looking at sector performance, financials were the strongest sector amidst strong corporate earnings reports. The bond proxies traded lower last week, with real estate investment trusts and utilities stocks declining as the US 10-year Treasury yield widened to 3.51% last week.

A key market dynamic appears to be the view a soft landing is looking more likely for the US economy, with investor sentiment recovering after the Silicon Valley Bank/Credit Suisse shock in March. The March Non-Farm Payroll number (which came out on April 7) supported this view and, last week, the US March Consumer Price Index (CPI) headline reading came out slightly lower than expected. The year-over-year CPI came in at 5%, down from 6% the prior month. In addition, the March US Producer Price Index (PPI) was down 0.5% month-over-month (m/m), a second straight monthly contraction. The core PPI was down 0.1% m/m. There are now hopes that easing inflationary pressures will support a soft landing for the US economy, as opposed to a hard recession.

There was some less-supportive data out on Friday, with US March Retail Sales worse than expected (-0.8% excluding autos) and a higher University of Michigan inflation forecast.

In that context, the market is now pricing in a 25 bp Fed hike at the 3 May meeting and then a pause after that. Indeed, the market is pricing in approximately 200 bps worth of cuts over a roughly 18-month stretch, starting in June. Looking at Fedspeak, we saw the minutes from the most recent Fed meeting last week, and they suggested more debate about the monetary policy path ahead, with several participants considering a pause, while others contemplated a 50 bp hike.

Looking at the CNN Fear & Greed Index, investor sentiment has improved sharply since mid-March when it was in “Fear” territory and is now comfortably in “Greed” territory.

Europe

It was a positive picture for European equities last week, with the STOXX Europe 600 Index closing at levels on Friday last seen back at the start of 2022. It was a quiet week for market volumes and newsflow, with nearly all markets closed on both Friday and Monday for Easter.

Looking at market themes, consumer stocks outperformed thanks to strong earnings numbers from Europe’s largest security by market capitalisation. Auto and bank stocks also rose. As in the United States, bond proxies lagged due to higher yields, with utilities weaker.

After a torrid time, real estate stocks saw short covering, driving the sector higher in something of a pain trade.

It was a quieter week for geopolitical news in the region, but worth noting that European gas reserves (at 56%) are well above historical averages for this time of year (30% higher than last year) as we enter spring. With that, the energy setup looks constructive for next winter now too. Given this was a key focus last year, this factor is supportive for European assets.

Looking at European macro data, the UK economy stagnated in February, as gross domestic product (GDP) came in at 0.0% vs. +0.3% previously, while German CPI was in line with expectations, up 0.8% m/m, and up 7.4% year-over-year.

Asia Pacific

Last week was strong in Asia, despite being relatively quiet on the macro front and the Easter holidays prompting some market closures in Hong Kong and Australia.

G7 foreign ministers started their meeting in Japan on Sunday, with tension over Taiwan providing a focus, as well as the ongoing war in the Ukraine.

Russian President Putin met with Chinese defense minister Li Shangfu over the weekend and hailed their “no limits” partnership.

Japan’s equity market had a strong week, with the Nikkei closing last week up 3.5%, as Warren Buffett spoke positively about his Japanese holdings and as weaker-than-expected US economic data boosted expectations of a cooling rate hiking cycle.

The new Bank of Japan (BoJ) Governor, Kazuo Ueda, came out with some generally dovish comments last week, which also helped with the risk-on trade. He dampened expectations of a sudden major monetary policy change, but also signalled that a revision of the bank’s large-scale easing stance could be considered in the near term.

Japan will be reporting inflation data this week, which is expected to see a rise in core inflation despite a drop in the headline rate. Japan will also report trade figures, Purchasing Managers Index (PMI) and industrial production numbers.

It is worth keeping an eye on the political landscape in the coming weeks as a potential early election could impact the timing of the end of the BoJ’s Yield Curve Control policy. Press speculation about an early election increased after a strong result for Prime Minister Fumio Kishida in local elections on 9 April and as he has benefitted from a bounce in his opinion poll ratings.

China’s market closed the week just in the green (up 0.32%), after a volatile week where we saw softer-than-expected inflation dampen investor sentiment.

China’s CPI rose 0.7% in March from a year earlier, down from a 1% rise the previous month. The PPI slid 2.5%, the lowest since June 2020. These numbers are obviously well below the government’s ~3% CPI growth target, which has raised expectations that the People’s Bank of China  will intervene to support the economy.

On the trade front, China’s exports unexpectedly rose 14.8% in March from a year ago, surprising analysts who had forecast a decline and marking the first increase since September. Imports fell a less-than-expected 1.4%.

The week ahead

A much busier week ahead is expected, with plenty of corporate earnings, macro data and Fed speak to focus on. There is a robust US earnings calendar this week, with a  few heavyweights reporting in the coming days. Looking at macro data, we have inflation data from the eurozone, United Kingdom, Japan and Hong Kong. On Friday, we have global PMI data. In Asia, China GDP will be closely watched on Tuesday.

In terms of central bank action, we get the Fed Beige Book on Wednesday and there are a few Fed speakers throughout the week.

Key macro reports

Monday

  • US Empire Manufacturing

Tuesday

  • China GDP
  • German ZEW Expectations Survey

Wednesday

  • UK CPI
  • Euro area CPI
  • Japan Industrial Production
  • China Industrial Production & Retail Sales
  • Federal Reserve Releases Beige Book

Thursday

  • Eurozone: Consumer Confidence
  • US: Jobless Claims, Philadelphia Fed Business Outlook, Existing Home Sales

Friday

  • UK Retail Sales
  • Japan CPI
  • Global PMIs

 


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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 17th April 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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