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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

Equity markets ended the first half of the year on a largely positive note, as investors shrugged off hawkish central banker comments. Last week was relatively quiet in terms of news flow, but at the annual European Central Bank (ECB) conference in Sintra, commentary from leaders at the major central banks suggested there was more work to do in taming inflation. Nonetheless, most equity benchmark indices moved higher throughout the week, with the MSCI World Index up 2.2%; the S&P 500 Index up 2.3%; the STOXX Europe 600 Index up 1.9%; and the MSCI Asia Pacific Index up 0.2%.

The picture was largely positive for global markets in the first half of 2023. Moves in US technology stocks were the most eye-catching. After a tough 2022 for the tech-heavy Nasdaq Index (down 32%), it bounced back sharply in the first half of 2023, with its best first-half performance in 40 years, up 39%. Nearly US$5 trillion has been added to the value of companies in the Nasdaq 100 since the start of the year, and with the strength in tech heavyweights, the S&P 500 Index is up 16% year-to-date (YTD) in 2023.

Gains were even more pronounced looking at the NSYE FANG Index, which was up 75% YTD.

In other regions, the STOXX Europe 600 Index was up 8.7% YTD, its highest level since 2007, with the UK’s equity benchmark lagging, up just 1.1% YTD. In Asia, Japan’s market was the star performer, up 27.2% YTD, while China A-Shares have languished as the reopening trade stalled, slipping 0.8% YTD.

With the recent gains, global stocks (MSCI All Country Index) have logged a third quarter of gains.

Week in review

United States

US equities were higher last week, albeit in quieter markets ahead of the Independence Day holiday on the 4th of July. Some benign macro data eased fears of a hard landing (harsh recession) for the US economy. Data from the US housing market also continues to surprise on the upside, with May new home sales surging 12.2% and a couple April house price indices coming in better than expected.

On the inflation front, there was also encouraging news. The core reading of the Personal Consumption Expenditures price index, a gauge the Federal Reserve watches closely, rose 4.6% in May, which was less than expected.

Federal Reserve (Fed) Chair Jerome Powell spoke at Sintra at the ECB conference and stuck with a broadly hawkish narrative. He suggested the Fed could potentially raise interest rates in July and September to curb persistent price pressures and cool a surprisingly resilient US labour market. Asked whether Fed officials now anticipate they will raise rates every other meeting after skipping a hike this month, he said that may or may not happen and that he wouldn’t rule out consecutive rate hikes.

The market is pricing in one to two more hikes this year, with a terminal rate of 5.4% vs. 5% currently.

Elsewhere, given the recent problems with Silicon Valley Bank and others, it was reassuring to see US banks perform well as 23 banks passed the US stress tests.

Looking ahead, all eyes are on second-quarter earnings season. It is worth noting the US companies will enter blackout periods when their buybacks will go on hold, removing some support for markets.

Europe

European markets saw a positive end to the quarter and first half of the year, trading up 1.9% last week. Focus was on inflation data across the eurozone. The June core Consumer Price Index (CPI) reading was slightly higher than expected, at +5.4%. There were contrasting fortunes across the continent, with Spanish inflation actually falling below 2% (1.6% CPI) while Germany saw CPI at 6.3%.   

European central bankers were also in action at Sintra, and the tone was unsurprisingly hawkish. ECB President Christine Lagarde said the central bank probably won’t be able to declare the end of its interest-rate hiking cycle anytime soon, stating, “It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached”.

In this context, European bond yields were higher on continued hawkish data.

Bank of England Chair Andrew Bailey said that there are signs of persistence in recent inflation data and that core prices in the United Kingdom are much stickier.

European equities continue to suffer from outflows, as the latest EPFR Global data showed that European stock funds suffered a 16th straight week of investment outflows, taking total withdrawals to US $27 billion YTD, and in the past week alone, Europe had biggest outflows among major regions with a US$4.6 billion exodus.

Asia Pacific

Markets were more subdued in Asia vs. other regions last week, with the MSCI Asia Pacific Index up 0.2%. It was a familiar picture, with equities in Hong Kong (+0.1%) and China (+0.1%) lagging while Japanese equities (+1.2%) outperformed. Look at YTD performance, it is worth stressing how well Japanese equities have done.

Last week saw some further lacklustre Chinese macro data, with the official manufacturing Purchasing Managers Index (PMI) coming in at 49, still in contraction mode. The non-manufacturing PMI came in slightly better at 53.2. Note, today the Caixin June PMI came out and was a bit better than expected at 50.5.

In terms of geopolitics, US Treasury Secretary Janet Yellen is visiting China to meet with Chinese counterparties. That said, there was some noise in the press that the Biden administration is considering new curbs on artificial intelligence (AI) exports to China.

Any news on potential Chinese stimulus will be closely watched this week. At a World Economic Forum Event, Chinese Premier Li Qiang was quoted as stating China will roll out more effective measures to expand domestic demand.

Elsewhere, Australia’s May inflation reading was much lower than expected, with the CPI coming in at 5.6%. The Reserve Bank of Australia meets on 4 July.

The week ahead

With a US half day on 3 July and full market holiday on Tuesday the 4th, we expect a quiet start to the week. In Europe, trading volumes were below average to start the week. Markets will have an eye on the Australian central bank interest-rate decision and the minutes from the last Fed meeting, which will be released Wednesday, so there are some interesting central bank events this week.

In terms of macro data this week, the US Institute of Supply Management data for June is a highlight, with manufacturing on Monday and services on Thursday. EU manufacturing PMI’s will also be released this week.

Finally, the June US employment report will be released on Friday, which is always captures market attention.

 


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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 3rd July 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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