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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 Investments 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 third quarter ended weak, with equity markets drifting lower on concerns around rising bond yields and the impact on inflation of continued higher oil prices. West Texas Intermediate crude oil hit US$95 a barrel last week, as OPEC production cuts constrained supply. Last week also felt noisy, with some volatility around quarter-end positioning into the end of the week.

On the week, the MSCI World Index declined 0.9%, the S&P 500 Index declined 0.7%, the STOXX Europe 600 Index declined 0.7% and the MSCI Asia Pacific Index declined 1.7%. For the third quarter, the MSCI World Index was down 4.4%, the MSCI Asia Pacific was down 3.6%, the STOXX Europe 600 Index was down 2.5% and the S&P 500 Index was down 3.6%.

Overall, it was tricky period across financial markets, with government bonds, corporate bonds and equities all declining. Commodities and the US dollar were the winners on the quarter. Historically, the third quarter has proven to be a weak time of the year for stock markets, and that has proven to be the case again this year. But on a brighter note, many market commentators are highlighting a more positive seasonality effect historically into year-end.

Week in review

United States

US equities declined last week. With the Federal Reserve (Fed) decision behind markets, and a couple of weeks until third-quarter earnings season, there is sort of a catalyst vacuum until around mid-October. In that context, focus turned to the move higher in US Treasury yields on the back of “higher for longer” interest-rate expectations, and with that, equities traded lower.

Quarter-end positioning moves were also a feature last week, with recent laggards seeing a bounce.

Fears around the impact on the US economy of the United Auto Workers union strike and a potential US government shutdown also weighed on market sentiment. Over the weekend, a shutdown was averted, with Congress agreeing to a temporary stop-gap measure. This ensures funding until 17 November, but notably did not cover further aid to Ukraine.

The US consumer is in focus, with US student loans repayments restarting this month after a three-year pause post-COVID. Federal student loan payments will come due starting on 1 October, which will likely constrain consumer spending.

In this environment, US investor sentiment in the CNN Fear & Greed Index went into “Extreme Fear” territory last week, although it ended the week in “Fear”.

Europe

European equities traded much lower for most of last week but recovered some ground on Friday into month and quarter-end. Investor concerns around higher bond yields and potentially stickier inflation continued to weigh on risk sentiment through the week. European yields continue to push higher, and of note, the Italian 10-year yield hit a high of 4.955% on Thursday. The Italian government has said it will only meet European Union deficit rules by 2026, setting up a potential clash with Brussels. The spread between German and Italian yields is the highest since March.

On Friday, the September Eurozone Consumer Price Index (CPI) report came in lower than expected, which helped to buoy European stocks. The report could be signalling that the worst is hopefully over, and the European Central Bank’s monetary policy tightening has taken effect. The headline inflation rate fell to 4.3% in September down from 5.2% in the year to August. Year-on-year inflation fell across all major categories but, of note, energy prices were down 4.7% in September, whilst food, alcohol & tobacco, and non-energy industrial goods and services all showed deceleration.

Last week, cyclicals outperformed defensives. Basic resources stocks, construction and materials stocks were higher. whilst utilities and telecommunications stocks declined. It was a choppy week for real estate stocks, which ultimately closed lower.

It is noteworthy that London is close to overtaking France as the largest stock market in Europe once again. The combined dollar-based market capitalisation of primary British listings now stands at US$2.9 trillion versus France’s US$2.93 trillion, according to Bloomberg data.

European credit conditions

With European equity markets weaker in September, it is worth checking in on European credit condition for signs of stress. The most referenced measure for European Credit is the XOVER Index, which has widened a little, but not in an alarming fashion. However, some charts show pressure building on weak balance sheets in the region.

Asia

Equities in Asia were weaker across the board last week.

Japan

The Nikkei closed the week down 1.68% as the move in oil prices and concerns around interest-rate expectations in the United States weighed on the market.

The government released a new economic plan, to be signed off in October, which gave some hope to the market. The plan will be aimed at capital investment, wage growth, and investment in people, as well as further subsidies to help alleviate the impact of stronger oil and gas prices and will all be funded by a supplementary budget.

The yen weakened further, prompting speculation that the government would step in to support the currency, but Finance Minister Shunichi Suzuki announced that the government didn’t have a specific level which would trigger intervention.

The yield on the 10-year Japanese government bond touched its highest level in in over a decade at c. 0.779%, even with the government stepping in to support the bond market.

China

The Shanghai Composite Index was one of the better-performing markets in Asia last week, despite being closed on Friday for the Mid-Autumn Festival holiday.

Of note, this week the market is closed all week for the National Day holidays and reopens again on Monday 9 October.

Over the weekend, the China Caixin Purchasing Managers Index (PMI) Composite came in at 50.9, vs. 51.7 prior, while the China manufacturing PMI came in at 50.6, and the China PMI Services at 50.2.

Some investors are speculating that the government may announce further policy support during the upcoming holiday period, including a new financial stability fund and relaxing the foreign ownership cap for equity investments. Currently, foreign ownership is capped at 30% for single stocks and 10% for a single foreign shareholder. While nothing has been confirmed yet and the discussion looks still in a nascent stage, the news would not be a total surprise.

Sector-wise, semiconductors gained on a new product launch from Huawei  covering its consumer electronics products, which reportedly saw strong demand.

Also, there were various reports that China Reform Holdings Corp, a state asset manager, is planning to launch a development fund worth at least CNY100 billion to invest in strategic emerging industries. It is expected to start operating within the year.

Hong Kong

Hong Kong’s equity market posted its fourth straight weekly loss and its biggest quarterly retreat in a year, with the Hang Seng closing the week down 1.37% as the debt crisis at property giant Evergrande intensified, triggering a broader concern about the sector.

Chinese developers fell, as sentiment was dampened after Evergrande missed payments and the chairman was taken into police custody, but the sector regained some ground on Friday on the news that Shenzhen will relax the floor for mortgage rates on first-home purchases.

The week ahead

As we enter the fourth quarter, there are several noteworthy events to keep an eye on this week. From a US perspective, highlights include a speech from Fed Chair Jerome Powell, JOLTS data and September employment data published on Friday. In Asia, there are several market holidays due to Golden Week in China. However, we do have monetary policy meetings in Australia, New Zealand and India. In Europe, PMI data may give insights to the health of the European economy.

Monday 2 October

  • UK Nationwide House Price Survey; UK S&P Global/CIPS Manufacturing PMI
  • Riksbank Monetary Policy Minutes
  • Switzerland PMI Manufacturing
  • Spain Unemployment Change; Spain HCOB Spain Manufacturing PMI
  • Italy HCOB Manufacturing PMI; Italy Unemployment Rate
  • France HCOB France Manufacturing PMI
  • Germany HCOB Germany Manufacturing PMI
  • Eurozone HCOB Eurozone Manufacturing PMI; Eurozone Unemployment Rate
  • US S&P/Markit Manufacturing PMI; US Construction Spending & Manufacturing (Institute of Supply Management)

Tuesday 3 October                     

  • France Budget Balance YTD
  • US JOLTS job openings
  • Reserve Bank of Australia policy meeting and interest-rate decision

Wednesday 4 October

  • Spain HCOB Services PMI
  • Italy HCOB Services PMI
  • France HCOB Services PMI
  • Germany HCOB Services PMI
  • Eurozone HCOB Services PMI; Eurozone Retail Sales & PPI
  • UK S&P Global/CIPS UK Services PMI
  • US ADP employment; US S&P/Markit Services PMI; US Factory Orders

Thursday 5 October  

  • UK Decision-Maker Panel Survey; UK New Car Registrations; UK S&P Global/CIPS Construction PMI
  • France Industrial & Manufacturing Production
  • Spain Industrial Production & Output
  • Germany HCOB Construction PMI; Trade Balance SA
  • US Challenger layoffs; US Continuing & Initial Jobless Claims

Friday 6 October

  • Germany Factory Orders
  • France Trade & CA Balance
  • Italy Retail Sales
  • US September Employment Report; US Consumer Credit
  • Reserve Bank of India policy meeting and interest-rate decision

 


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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 2nd October 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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