Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

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. 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.

The Digest

Last week was a busy one for markets ahead of what is expected to be a very quiet holiday period. Central bank announcements on Wednesday and Thursday from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) kept investors on their toes.

The hawkish commentary from central banks drove most of the price action last week; however, market moves were at times counterintuitive. The move higher in stock markets post-Fed was heavily defensive-driven, suggesting it wasn’t as “risk-on” as it appeared. With that, markets did lose all their gains from Wednesday into Thursday by the end of the week. The S&P 500 Index closed last week down 1.9%, the European Stoxx 600 Index was down 0.4%, whilst the MSCI Asia Pacific Index was down 1.3%.

Volumes were fairly lacklustre all week, but they were given a shot in the arm on Friday with quadruple witching—when stock options, stock index options, stock index futures and single stock futures contracts expire.

Central Banks in Focus

According to the Bank of America Fund Managers Survey from last week, investors cited one of the biggest current tail risks as “hawkish central bank rate hikes”. Fund managers had become notable bearish, with cash levels surging to 5.1% in December. As we noted last week, CNN’s Fear and Greed Index points to “Fear” levels driving market moves over the last few weeks. That set the backdrop ahead of an important week for central bank interest rate decisions.

First up was the Fed on Wednesday. The final Federal Open Market Committee (FOMC) meeting of the year was decidedly hawkish, but came in largely in line with expectations. The committee announced that it would be moving to end the Fed’s bond buying in March, accelerating the taper amount to $30 billion a month. Also, the Fed’s “dot plot” forecast shows officials now expect to raise the fed funds rate three times next year and three times in 2023, based on median projections.

The market liked the fact that the Fed still seems flexible and maybe not quite as aggressive as feared on rate hikes. Once the speedier taper concludes in mid-March, the FOMC will make its decision in the following weeks on when to hike rates. The market will remain wary of a hike in March, as soon as the taper ends. Although the market is pricing in a 48% chance of a rate hike in March, a hike in June instead would be much more palatable.

The BofE surprised for a second month in a row, as it unexpectedly raised rates from 15 basis points (bps) to 25 bps on Thursday.4 Recall, last month the central bank surprised us by not raising rates. Following some recent cautious BoE commentary and the gloomy Omicron backdrop, the market saw just a 30% chance of a rate hike at last week’s meeting; however, the committee voted 8-1 to raise rates, so the margin of vote was also a hawkish surprise. It stated that since November’s Inflation Report “there has been significant upside news in core goods and, to a lesser extent, services price inflation”. The release said inflation will likely peak at 6% in April 2022. Note: the UK Consumer Price Index (CPI) year-over-year came in at 5.1% Thursday. The BoE stated that its remit is clear—the 2% inflation target applies at all times. In addition, the labour market is tight and has continued to tighten.

Regarding Omicron, the BoE simply said its impact on inflation was unclear at this stage and it would review the risks in February. Looking ahead, the BoE does not guide to further hikes in “coming months”, preferring to instead talk about “modest tightening” over the forecast period. While a 15 bps hike doesn’t move the needle too much, some media were calling it a “warning shot” on inflation.

Although less dramatic than the BoE, Thursday’s ECB meeting was more hawkish than some expected. The asset purchase programme add-on was smaller than expected, and the central bank’s new inflation forecast higher than expected. Despite that, ECB President Christine Lagarde said it was very unlikely the ECB will raise rates in 2022. Rates stayed on hold at -0.5% and the Pandemic Emergency Purchase Programme (PEPP) will conclude in March, both in line with consensus expectations.

The asset purchase programme continues at slower pace than expected. As anticipated, the net asset purchases under the PEPP will terminate at the end of March, but with the reinvestment period extended by a year to (at least) end-2024.

The ECB also raised its inflation projection to 2.6% for 2021 and 3.2% for 2022, increased its growth projection for 2021 to 5.1%, but cut its growth projection for 2022 to 4.2%.

COVID-19 Remains a Market Focus as Omicron Cases Surge in the United Kingdom

Investors continue to assess the economic impact of high COVID infection rates. The latest variant, Omicron, drove the number of infections in the United Kingdom to new daily highs last week and now accounts for about 60% of new cases in the country. Public health officials in the United Kingdom said that without action, the country could face up to one million infections per day by the end of December. The efficacy of the vaccine against the Omicron variant is still unclear as the spread of the variant is still in its infancy.

Hospitalisations remain relatively low; nonetheless, people in the United Kingdom are being encouraged to get their booster jabs as soon as practically possible. The UK government, as well as the devolved parliaments, have avoided officially bringing in any restrictions as such, preferring to urge people to be cautious. The hospitality sector has been hit in the last couple of weeks as customers cancel bookings, fearful of contracting COVID and having to isolate over the Christmas period. UK Prime Minister Boris Johnson denied that the country was being put into lockdown by stealth.

Omicron is expected to become the dominant strain across the eurozone shortly. Governments seem more reluctant to resort to blanket lockdowns than they were in previous waves, but discussions are ongoing. The Netherlands has introduced preventative measures include shutting restaurants, leisure venues and non-essential shops until January 14. Some countries have brought in travel curbs from the United Kingdom.

The impact of Omicron is expected to soon have an impact in the eurozone; however, the curve could well be flatter than we have seen in the United Kingdom because of tighter restrictions. The United States, however, could be more at risk given the lower vaccination rate.

On the data front, the flash service Purchasing Managers Index (PMI) data for the eurozone and the United Kingdom showed sharp declines in December but are still in growth territory. At this stage, the impact of Omicron is not clear, so drawing conclusions on the economic impact in the first quarter of next year is difficult. It still poses a major risk to economic activity in Europe in the new year, with hospitalisation rates lagging infection stats by a few weeks.

The Week in Review

Europe

Last week was interesting for European equities amid a number of catalysts. Asa noted, central bank policy meetings were the key focus for the week, amidst a backdrop of surging Omicron cases across Europe. The hawkish Fed announcement on Wednesday was a focus, along with the BoE’s aforementioned interest rate hike, which came as a surprise to the market given the worsening COVID situation in the United Kingdom, and also the ECB’s formal announcement of the end of the emergency QE PEPP for March 2022.

Worsening volumes are another dynamic the market has had to contend with as we head into holiday season. Thursday’s rate announcements, as well as Friday’s quadruple witching, did provide some final catalysts for an uptick in stock market volumes last week, ahead of what is expected to be a very quiet few weeks ahead.

Value stocks were a big outperformer last week in Europe, while momentum stocks were down. The Stoxx 600 Index closed last week down 0.4%; however, sector performance was mixed with performance divergence >5% between best and worst performers. Basic resources stocks were higher last week as the US dollar drifted following the FOMC announcement. Materials stocks also performed well globally last week with investors remaining hopeful on Chinese stimulus. Commodities in general continue to be a key focus for markets, with natural gas prices in Europe hitting a new record through the week.

Health care and food and beverage stocks also generally rose last week as investors favoured defensives overall. In terms of the laggards, autos were particularly weak. European November registrations were down 17.5% year-on-year, in turn highlighting that semiconductor shortages continue to plague sales, iced by fears that Omicron will force dealerships to close. Retail stocks also underperformed, with sentiment poor heading into Christmas. Travel and leisure stocks struggled again, finishing last week lower, but recovered most of their losses after a bounce on Friday. Fears of further travel restrictions around Europe have weighed on the sector once again.

United States

US equities experienced a volatile week as markets negotiated a glut of central bank news flow, rising Omicron fears and Friday’s quadruple witching options expiry event. The S&P 500 Index did make fresh all-time highs on Wednesday but pulled back sharply on Thursday. By the close on Friday, all three major US equity benchmarks were lower. The CBOE VIX Volatility index was up 32%, reflecting the choppy performance.5

Looking at the chart of the S&P 500, it’s worth noting 4700 has recently become a resistance level. The market has failed to push through that level several times, and indeed the index has fallen back to support at its 50-day moving average, a key technical indicator.

Sector performance in US markets oscillated through the week as markets, but by Friday there was a clear “risk-off” bias to the weekly sector performance with health care, utilities and consumer staples stocks higher, while energy and consumer discretionary lagged. With the risk-off tone, some of the crowded technology trades saw profit taking, with the NYSE FANG+ Index down 4.5% on the week.

Whilst concerns over the Omicron COVID variant have primarily been focused on Africa and Europe, it is certainly becoming more of a concern in the United States. Cases are reported to have been found in all states now, and President Joe Biden urged people to get vaccinated or get the booster jab; less than 30% of vaccinated people over the age of 18 have had a booster. COVID-19 cases are rising sharply in some cities, with cases in New York city at the highest level since March.

The Fed meeting overshadowed other macro data, but it is worth noting we had December PMI data. The US Manufacturing PMI came in at 57.8, which was weaker than anticipated, while Services was also weaker than expected at 57.5, and the Composite 56.9, down from the prior month. The report also showed inflation remains a concern.

Finally, news from US politics is negatively impacting global markets as we head into the holiday period. West Virginia’s Democratic senator, Joe Manchin, has stated he cannot back President Biden’s marquee stimulus legislation. Recall, the US Senate is split 50/50, so Manchin’s opposition prevents Biden progressing the bill. Manchin fears the stimulus bill will raise inflation, taxing “every hard-working American at the gasoline pumps… grocery stores and utility bills”.  Another example of how the debate over inflation seems omnipresent at the moment.

Asia and Pacific

Asian equities closed last week lower overall, with a few factors continuing to weigh on markets in the region. The MSCI Asia Pacific Index closed the week down 1.3%. Omicron remains a major talking point in Asia as governments mull over tightening restrictions to prevent a surge in cases.

Hong Kong’s Hang Seng lagged as property developers faced more selling. Chinese developers were under pressure again last week over liquidity concerns. Also, Chinese activity data reflected weakness in the sector, with fixed asset investment growth slowing further. New house prices contracted at a sharper pace, whilst new home sales and new constructions fell, intensifying the focus on developers’ liquidity concerns. Kaisa resumed trading today (20 December) and closed down 14% following a trade freeze after news the company had defaulted on bond payments and appointed a financial advisor to assess its capital structure. Also, Chinese Estates closed down 22% after the company said that proposed privatisation will not proceed.

Renewed frictions between the United States and China also weighed on sentiment. The US House passed legislation on Tuesday banning imports from the Xinjiang region over concerns about forced labour. The Treasury Department reportedly blacklisted eight Chinese companies.

Week Ahead

Monday 20 December     

  • Eurozone Current Account Balance
  • UK CBI Trends
  • US leading economic indicators

Tuesday 21 December

  • UK Public Sector Net Borrowing
  • Italy Retail Sales
  • Germany Consumer Confidence
  • Eurozone Consumer Confidence
  • US Current Account

Wednesday 22 December       

  • UK gross domestic product (GDP), Exports/Imports, Current Account Balance
  • France Producer Price Index (PPI)
  • US Gross Domestic Product, Real Consumption, Core PCE, Existing Home Sales

Thursday 23 December       

  • Spain GDP
  • Italy Consumer Confidence, Manufacturing Confidence, Economic Sentiment
  • US Jobless Claims, Durable Goods, Personal Income/Spending, New Home Sales

Friday 24 December       

  • Germany Import Price Index

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 20th December 2021, 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.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Share on facebook
Share on linkedin

Latest news articles

All News

BlackRock Commentary: Sour Fed growth view not dour enough

Many central banks, like the Fed, are still solely focused on pressure to quickly get core inflation back to 2% without fully acknowledging how much economic pain it will take in a world shaped by production constraints.

Notes from the Trading Desk - Franklin Templeton
All News

Notes from the Trading Desk – Franklin Templeton

The Federal Reserve (Fed), the Bank of England (BoE), the Swiss National Bank (SNB), Norges Bank and the Riksbank all raised interest rates last week and paved the way for further hikes at upcoming meetings.

All News

BlackRock Commentary: Sticking with reduced risk taking

Business activity is slumping and higher inflation persists. Central banks are responding with aggressive rate hikes without fully acknowledging the growth damage. The new regime of macro volatility is taking root with weaker growth, persistent inflation and volatile markets.

Experience better banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. Sign up and open your account for free, within minutes.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.