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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

The second half of October has seen a sharp global equity bounce. Investors shrugged off weaker earnings from US technology company heavyweights as hopes of a central-bank pivot toward less hawkish policies gathered some momentum. The MSCI World Index was up 4%, while regional performance was similar to the week prior, with the S&P 500 Index up 4%, STOXX Europe 600 Index up 3.7%. Asia lagged, with the MSCI Asia Pacific Index down 0.2%.

With that, the moves for October are worth noting as there is some stark divergence, with the S&P 500 Index up 8.8%, STOXX Europe 600 Index up 5.8%, and the MSCI Asia Pacific Index down 2.4%.

Suggestion of a central bank pivot?

Last week saw a rise in the market noise around the prospect of a central bank pivot to more dovish policies, thanks to a combination of weaker US data and less hawkish central bank comments.

Early in the week, US housing market data showed a slowing of activity, with the sharpest deceleration of house prices since the series started. The market took this as “bad news is good news” in that weaker data could pressure to the Fed to ease off on its hawkish policy path.

Last week’s Bank of Canada (BoC) decision caught some attention as the central bank raised rates by a lower-than-expected 50 basis points (bps). In addition, BoC policymakers stated they see a significant slowing of the Canadian economy and are getting closer to the end of tightening. Thursday’s European Central Bank (ECB) meeting was less Hawkish than expected. The ECB raised interest rates by 75 bps (bringing the deposit rate to 1.5%), largely as expected. Inflation in the eurozone surged to 9.9% in September, so a tightening of the central bank’s monetary policy stance was anticipated.

Crucially, the Governing Council said it was taking a meeting-by-meeting approach to monetary policy decisions but was satisfied that it had already made “substantial progress in withdrawing monetary policy accommodation”. This is a change in working the previous meeting where the ECB said, “the certainty is that we are far from the goal”.

ECB President Christine Lagarde said the ECB will raise rates further in the future, but the size will be dependent on data. Economic activity has slowed significantly, and the central bank sees further weakening in the fourth quarter and into the first quarter of next year.

It is interesting that following the ECB meeting last week, we saw some stronger-than-expected inflation data out of Europe, with Italian, French and German inflation readings all higher than anticipated.

The week in review


European equities gained ground last week as investors navigated a glut of corporate earnings and a busy couple of weeks for central-bank decisions. Although the US Federal Reserve (Fed) is in a black-out period in terms of speaking ahead of its policy meeting on 2 November, hopes of a broader central bank dovish pivot were raised after the BoC’s smaller-than-expected hike as well as the “less hawkish” ECB announcement.

We saw notable dispersion between the best- and worst-performing sectors. Falling bond yields gave traditional yield plays a boost, with real estate and utilities stocks gaining last week. Basic resources stocks declined, along with iron ore, which slumped on China concerns.

We think the unwind of bearish positioning has also been a factor recently. However, fund flow data still shows outflows from European equities.

Looking at broader themes, equities took the appointment of Rishi Sunak as UK prime minister as constructive, and an improving European energy outlook for this winter also helped sentiment.

UK assets recover: In the United Kingdom, after the chaos of the short-lived Truss administration, the swift appointment of Rishi Sunak reassured markets. The British pound continues to recover ground and UK gilt yields tightened significantly across the curve. Domestic UK equities also have performed well in the past week, with the FTSE 250 Index moving higher. Sunak has delayed the autumn statement on tax and spending to 17 November to wait for more accurate economic forecasts—which also reassured investors.

European energy outlook: Mild autumn weather (22C/72F in Berlin on Friday) and close-to-capacity gas reserves helped European gas futures fall to pre-Russian invasion levels at one point last week. There is still a long way to go before we get through the winter, and questions remain over longer-term gas supply, but from a European perspective the picture looks encouraging.

Credit: Also worth noting, European credit conditions have improved in this context, with the XOVER tightening by some 100 bps from recent highs.

United States

US equities continued their recovery last week, with the S&P 500 Index on track for its best October since 2011 despite some underperformance by the so-called “FANG” stocks. Hopes of a dovish pivot from the Fed seemed to dominate the narrative last week as the macro data disappointed and the “bad news is good news” trade seemed to re-emerge. The Fed is expected to raise rates by 75 bps on Wednesday, with the pace slowing thereafter as the macro picture declines. Fed officials spent all of last week in blackout period, so we didn’t hear any fresh comments.

Weakening US macro data led to a sharp move in yields, with the US 10-year note registering its first fall in 13 weeks, which supported the move in equities last week. US corporate earnings so far have been beating estimates overall; however, a couple of guidance warnings among the bellwethers dampened investor sentiment a little. US-focused equity funds saw their third straight weekly inflow.

So far, just under half of the S&P 500’s market capitalisation has reported third-quarter (Q3) earnings. Earnings are beating estimates overall, and value stocks are delivering stronger revenue and earnings per share (EPS) growth than growth stocks. More globally oriented S&P 500 companies are delivering faster EPS growth than their more domestically oriented peers.

Consumer-exposed companies are continuing to forecast slowing sales, with Amazon cutting sales guidance ahead of the holiday period. Meanwhile, Meta shares fell 25% after its earnings came up short of expectations and warned of higher investment costs. Meta has now lost some US$700 billion in market cap since its highs in September 2021.

In terms of sectors, communication services was the only sector to finish the week in the red, as losses in Google and Meta spurred declines. Meanwhile, industrials were higher last week, along with utilities and real estate investment trusts.

US macro data disappointed last week. Home price data was weak, with the FHFA House Price Index and the S&P CoreLogic CS both weaker than anticipated. Pending home sales were down 10.2% in September. Meanwhile, the Conference Board’s US consumer confidence reading declined in October.

The CNN Fear & Greed Index is now in “Greed” territory. As recently as 14 October this was in “Extreme Fear” territory, demonstrating just how quickly markets/sentiment has changed into month-end.


Last week was mixed in Asia, but most of the focus was on China and Hong Kong, which suffered in the wake of President’s Xi Jinping’s new hardline politburo appointments, seemingly increasing his power in the country, together with an increase in COVID-19 numbers.

Japan’s equity market held up pretty well, closing slightly higher last week. The market got off to a decent start on hopes that the Fed may pivot and adopt a less aggressive policy stance than previously anticipated. However, ground was lost later in the week as investors digested weaker earnings reports, and Prime Minister Fumio Kishida announced a ¥71.6 trillion stimulus package.

On Wednesday, the Bank of Japan (BoJ) increased its purchases of JGBs, adding a further ¥100 billion in 10-25 year debt and ¥50 billion in longer-dated paper. This increase was anticipated, but it nevertheless prompted sharp gains at the long end of the yield curve, where yields fell sharply to their lowest levels since mid-October. Meanwhile, benchmark 10-year JGBs also dipped sharply late in the week, finishing around 0.237%, having started the week at 0.251%.

There was a fair bit of macro news out last week. Japan’s manufacturing sector continued to expand in October, as the latest Purchasing Managers Index (PMI) data released on Monday registered a reading of 50.7. The BoJ wrapped up its monetary policy meeting on Friday, announcing that it would hold interest rates at ultra-low levels (-0.1% for short-term rates, and 0% for 10-year government yields), as widely anticipated. However, it raised its target for core consumer inflation to 2.9% for the fiscal year ending March 2023 and 1.6% the following year. Elsewhere, in Tokyo we saw some higher inflation readings.

China’s equity market performed poorly last week, with A-shares under heavy selling pressure after the 20th Party Congress concluded. The new politburo showed China’s growing emphasis on ideology over pragmatism, meaning that there seems to be little chance of China lifting its zero-COVID policy any time soon. Several Chinese cities doubled down on COVID-19 curbs after the country reported three straight days of more than 1,000 new cases nationwide.

Notably, food and beverage stocks were lower last week, given the continued gloomy outlook for consumption. Military and defence stocks rose as President Xi (worryingly) emphasized army and military force development.

There were also reports emerged that major Chinese state-owned banks sold dollars in both onshore and offshore markets during the week after the slide in China’s currency.

Despite a better-than-expected year-over-year gross domestic product (GDP) number, China saw some other weaker macro data last week, which didn’t help markets, namely retail sales and imports and exports.

Hong Kong’s equity market was the worst-performing market in Asia last week, closing down 8.32%. Most of the hit came on Monday after the 20th Party Congress in China, as major tech shares plunged after President Xi packed key posts in the politburo with loyalists. Tencent, Alibaba, Kuaishou and Baidu all suffered badly.

The week ahead

The next two weeks could be key for setting the tone into year end. There are several central bank meetings this week, including the Reserve Bank of Australia, Fed, Norges Bank and Bank of England.  Wednesday’s Fed interest-rate decision and statement will likely be the key event of the week.

Looking further ahead, the US mid-term elections on 8 November will also be important. Polls over the weekend suggest the Republicans could win control of the House of Representatives as voters focus on soaring inflation. Interestingly, following mid-term election years the S&P 500 Index has been up 18 of 18 times since 1950.

Finally, over the weekend we saw Luiz Lula de Silva beat incumbent Jair Bolsonaro to become Brazilian president.

Monday 31 October

  • Switzerland Retail Sales Real
  • Spain Retail Sales
  • Italy GDP
  • UK Net Consumer Credit
  • UK Mortgage Approvals
  • Eurozone CPI estimate & GDP
  • US Treasury financing

 Tuesday 1 November

  • Sweden Swedbank/Silf PMI Manufacturing
  • Switzerland PMI Manufacturing
  • UK Nationwide House Prices
  • UK S&P Global/CIPS Manufacturing PMI
  • US S&P/Markit Manufacturing PMI
  • US Construction spending & JOLTS job openings

Tuesday 2 November

  • Germany Trade Balance
  • France Budget Balance year-to-date
  • Spain S&P Global Manufacturing PMI
  • Italy S&P Global Manufacturing PMI
  • France S&P Global Manufacturing PMI
  • Germany unemployment change
  • Eurozone S&P Global Manufacturing PMI
  • US ADP Employment
  • US Federal Open Market Committee meeting

Thursday 3 November

  • Spain unemployment change
  • Italy unemployment rate
  • UK Official Reserves Changes
  • UK S&P Global/CIPS Services PMI
  • UK Bank of England policy meeting
  • Eurozone unemployment rate
  • US Challenger layoffs
  • US Jobless claims & trade balance
  • US Factory Orders

Friday 4 November

  • Germany Factory Orders
  • France Industrial & Manufacturing Production
  • Spain S&P Global Spain Services PMI
  • France S&P Global Services PMI
  • Germany S&P Global Germany Services PMI
  • UK New Car Registrations
  • Eurozone S&P Global Services PMI
  • UK S&P Global/CIPS Construction PMI
  • Eurozone PPI
  • US October Employment Report


Franklin Templeton Key risks & Disclaimers:

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 30 October 2022, 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.


MeDirect Disclaimers:

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.

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