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.
Last week was tricky for equity markets, which lost ground on fears inflation was proving stickier than anticipated and central banks would keep rates higher for longer as a result. The catalyst was some hotter-than-expected inflationary data and a more hawkish set of minutes from the most recent Federal Reserve (Fed) meeting. With that, bond yields climbed sharply—the US two-year Treasury yield rose to its highest level since 2007 and European bond yields also moved sharply higher. In this environment there was a clear “risk-off” trade. The MSCI World Index declined 2.6%, the S&P 500 Index declined 2.7%, the MSCI Asia Pacific Index declined 2.4% and the STOXX Europe 600 Index declined 1.4%.
The week in review
The S&P 500 Index saw a third consecutive weekly decline, as hotter Personal Consumption Expenditures (PCE) inflation data brought increased concerns of a hawkish Fed. With the move lower, the S&P 500 Index fell through 4000 and looks to be nearing support at its 200-day moving average, a key technical marker. Other US indices also saw declines, with the Nasdaq 100 Index down 3.1%, its second-worst weekly performance of the year, and the Russell 2000 Index was down 2.9%.
Inflationary fears in focus: Last week saw some key datapoints signal inflation may be proving stickier than hoped. The US January Purchasing Managers Index (PMI) Service data set off some alarm bells early in the week, as the prices-charged component saw an increase versus the prior month and logged its highest reading since October 2022. Furthermore, on Friday, the January PCE data headline reading saw a year-over-year (y/y) gain of 5.4%, also higher than the prior month. The Core PCE reading rose 4.7% y/y. This is one of the Fed’s favoured gauges for monitoring inflation; hence the market sold off sharply on this data.
On Wednesday, the minutes from the last Fed policy meeting were released and had a slightly hawkish tone. They showed some members warning that “insufficiently restrictive” policy could stall progress on moderating price pressures, suggesting the Fed is prepared to tighten interest rates beyond its December forecast of a 5.1% peak.
With all this, by the end of the week Fed fund futures has priced in peak rates of 5.40% in July, up from 5.283% in July at the end of the previous week. Derivative markets are now implying a 40% probability of rates topping 5.5% after the Fed’s July meeting. A month ago, traders had practically ruled out that possibility. The market’s inflation expectations have seen a notable increase, with the two-year breakeven now back to levels last seen in summer 2022.
In a risk-off market, it was not surprising to see consumer discretionary and communications services stocks as the worst-performing sectors. The energy sector was the only one in positive territory last week as crude oil stabilised.
Unsurprisingly, investor sentiment has waned, with the CNN Fear & Greed index now almost back in “Neutral” territory, having been in “Extreme Greed” just a couple of weeks ago.
European equities traded lower last week following a late selloff on Friday. The market shifted into risk-off mode on Friday following the US PCE data, which showed that inflation remains sticky. European equities closed lower overall, and European-focused equity funds logged a small outflow this week, shedding US$50 million.
Cyclicals underperformed defencives last week. Media stocks rallied on positive earnings reports. Defencive sectors made up most of the outperformers, with food and beverage stocks slightly higher while utilities and telecomms were slightly lower. At the other end, basic resources closed the week with sharper losses for a number of reasons, but drivers included profit-taking on the China reopening trade as well as US dollar strength. Also, earnings in that space have been disappointing, with most of the main players trading lower after reporting earnings. Real estate stocks closed lower last week amidst the higher rate environment.
There was a flurry of macroeconomic data in Europe last week. Eurozone PMIs came in stronger-than-expected, mainly driven by services, with manufacturing a touch weaker. January Flash Composite PMIs came in at 52.3, slightly higher than expected, with Services at 53.0 and Manufacturing at 48.5. UK PMIs were also strong; the Composite figure came in at 53.0, while Services was at 53.3 and Manufacturing at 49.2. UK Consumer Confidence rose more than expected in February, coming in at +7, the largest month-over-month increase in almost two years.
Looking beyond the equity market, there have been some extreme moves in sovereign yields, with the market repricing a more hawkish central bank path. In the United Kingdom, two-year gilt yields climbed sharply, rising 15 basis points (bps) to 4.03%, the highest level since October. Also, German two-year yields rose as much as 15 bps to above 3.06% (the first time above 3% since 2008). Money markets now are pricing the ECB deposit rate to peak at around 3.85% later this year, compared to a terminal rate of around 3.5% predicted at the start of the year.
This week also marked the one-year anniversary of Russia’s invasion of Ukraine. From a market perspective, over the last year, investors have moved notably into cash and have sold down bonds. Fund flows since February 2022: US$354 billion to cash, US$40 billion to equities, US$12 billion from gold, US$135 billion from bonds.
Asian equities traded lower overall last week, despite missing the global market selloff on Friday. Hong Kong’s Hang Seng was particularly weak, down 3.4%. The Shanghai Composite outperformed, up 1.3%.
The main theme for markets was around increasing global rate-hike expectations, but the speed of China’s COVID-19 reopening also weighed on markets last week. Metals prices fell as concerns rose that China isn’t reopening as quickly as was hoped, and there are signs of COVID restrictions being reintroduced. Several schools were closed across China last week to prevent the spread. With that, copper and aluminium stockpiles are building in China. Also, the Yunnan province announced another round of production cuts to stabilise power supplies as the province’s hydro-electric grid struggles to cope with a prolonged drought and low reservoir levels.
Stocks in Hong Kong logged a fourth weekly loss, with earnings weighing on the market. Technology stocks plummeted following disappointing earnings from Alibaba and NetEase. There was also a headline that JD.com is planning a subsidy campaign, which will cause a surge in competition, threatening margins and spooking investors.
In Japan, Bank of Japan (BoJ) Chair nominee Kazuo Ueda addressed the Diet. His comments appeared to be reassuring, suggesting there would be no dramatic changes to loose BoJ monetary policy.
The week ahead
The United Kingdom will be in focus today as Rishi Sunak and Ursula von der Leyen meet for final talks ahead of an expected announcement of a post-Brexit settlement. Later in the week, the European Central Bank (ECB) meeting on Thursday will be a focus. A 50 bp rate hike is expected, with ECB President Christine Lagarde recent stating that there’s every reason to believe another would be coming in March.
Monday 27 February
- Euro area: EMU: Retail Sales NSA
- Euro-area Credit Data
- US Durable Goods Ex-Transportation/Cap Goods Orders Nondef Ex-Air (Jan)
Tuesday 28 February
- Sweden fourth quarter gross domestic product
- France HICP Inflation
- Spain HICP Inflation
- US Advance Goods Trade Balance, Retail/Wholesale Inventories, House Price Purchase/FHFA House Price Index
Wednesday 1 March
- UK Nationwide House Price Survey; UK Mortgage Approvals
- Germany HICP Inflation
- US Construction Spending; MBA Mortgage Applications
- China PMI
Thursday 2 March
- Euro-area Flash CPI Inflation
- Italy HICP Inflation
- ECB Monetary Policy Account
- UK Decision Maker Panel Survey
- US Unit Labour Costs, Nonfarm Productivity, Initial Jobless/Continuing Claims (Feb)
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 27th February 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.
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.
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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.