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
Global equities were mixed last week, selling off into the end of May before bouncing at the start of June. The MSCI World Index finished the week up 1.6%, while the S&P closed the week up 1.8%, the STOXX Europe 600 Index closed up 0.2%, whilst the MSCI Asia Pacific Index was up 1.7%. There wasn’t really one overarching theme that drove market moves last week. The US debt ceiling continued to make headlines, which buoyed risk assets as the deal passed in Congress.
Equity markets kicked on again following Friday’s May employment report, as the market appeared to look beyond the better-than-expected non-farm payroll figure and focused on the rise in the unemployment rate to 3.7%. In terms of fund flows, last week equities saw the largest weekly inflow since February, totalling US$14.8 billion. Technology stocks saw the largest weekly inflow on record.
Data around market breadth has been interesting of late. In the United States, May notched the worst breadth behind a market gain ever—just 28% of S&P 500 members were up on the month, with only five stocks accounting for 96% of the S&P’s gains this year. Market breadth is deteriorating quickly in Europe, too.
Week in review
Europe
Last week was mixed week for European equities, closing out May lower before bouncing into the end of the week. As noted, the STOXX Europe 600 Index finished down 3.2% in May, its worst month of the year so far. Whilst Hong Kong’s Hang Seng Index hit bear market territory (dropping 20% from January highs) and the technology-heavy Nasdaq Index continues to rip higher, European equities appear to be somewhere in the middle.
Cyclicals in Europe outperformed defensives last week, with basic resources stocks closing higher on speculation that China is weighing a property market support package to boost its economy. Real estate finished higher on the week amidst some significant short covering on Friday. Defensives lagged, with health care, personal and household goods, and food and beverage all lower. Telecomms were the week’s laggard.
Inflation appears to be continuing to cool in the eurozone. The Eurozone Consumer Price Index (CPI) report fell sharply to 6.1% in May, with the Core CPI down moderately to 5.3% from 5.6% in April. Peak interest rates were repriced lower on the back of the report. Whilst some European Central Bank (ECB) officials welcomed the retreat, they did continue to push the hawkish messaging last week. Comments suggest officials are still committed to a June hike, and there remains a strong possibility of a hike in July too, as they continue to fight inflation. The market had fully priced in two 25 basis point hikes for June and July, but we saw that probability pare back after the inflation prints last week.
As mentioned, May was the worst month of the year for European equity markets so far and the worst month relative to US equities since the 2020 COVID-19 crash. It is usually a weak month, and the trading range had been tight all the way through April. Sector performance divergence was large in May between the best-performing sector (technology) and worst-performing (real estate).
United States
US equities finished broadly higher last week. Risk sentiment improved during the week as US lawmakers passed the bill designed to suspend the government’s debt ceiling through until 2025. The debt-ceiling debate had been a hot topic for markets in preceding weeks, but passed without too much fuss. We now expect a round of Treasury-bill issuance to hit the market, which should impact broader liquidity. The S&P 500 Index closed last week up 1.8%, finishing firmly above 4200, which has been a clear technical resistance level so far this year. A risk of a significant short squeeze remains.
All US sectors finished higher last week, with cyclicals outperforming defensives. Consumer discretionary stocks outperformed amidst data pointing to a resilient US labour market. The defensives lagged, although utilities and consumer staples still finished slightly higher. Meanwhile, the Nasdaq 100 Index hit a new relative high versus the Russell 2000 Index last week.
Debate rages on as to whether the Federal Reserve (Fed) will pause its tightening cycle in June, with markets now pricing in just a 25% chance of a rate hike this month. Board members Jefferson and Harker both signalled support for skipping a month, complementing previous comments from Fed Chair Jerome Powell who said the Fed faces uncertainty on the lagged effects of tightening so far.
Last week’s data releases added fuel to the debate. In terms of misses, the Dallas May Manufacturing Purchasing Managers’ Report (PMI) fell for the fourth consecutive month, its worst run since May 2020. Chicago’s equivalent was a large miss as well, coming in at 40.4.
However, there were a number of high-profile reports last week that were more upbeat. US job openings came in at 10.1 million, with the prior number being revised higher, too. The May employment report came out on Friday, and nonfarm payrolls came in at 339,000, higher than expected. The prior report was also revised up.
With the US labour market displaying continued strength, it’s fair to say that the data is not consistent with an imminent recession, which lifted equity markets. However, the US labour market doesn’t appear to be slowing enough to ease inflation, which will give the Fed plenty of food for thought heading into its policy meeting next week.
Asia Pacific
Last week was a good one for Asia overall as the MSCI Asia Pacific Index finished the week up 1.67%, with Japan’s market leading the way, up 1.97%.
Chinese equities rose after the US Senate passed legislation to suspend the debt ceiling, reviving investors’ risk appetite, with the lower likelihood of a Fed rate hike in June also helping sentiment.
Elsewhere, all eyes were on China’s economic releases last week, starting with the official PMI and Caixin PMI numbers, which showed a big divergence. The official PMI dropped more than expected to 48.8, the lowest reading since December 2022, whereas the Caixin PMI was higher than expected, rising to 50.9. Despite this discrepancy, the market is indicating a downward economic trend and an urge for policy stimulus/easing.
Also, industrial profits fell 20.6% in the first four months of the year versus the prior year, only marginally better than the 21.4% decline recorded in the first quarter, amidst waning domestic and external demand. And finally, new home sales rose 6.7% in May versus the prior year, down from gains of more than 29% in the previous two months—further evidence of a waning recovery, despite several stimulus measures from the government at the end of 2022.
Sector-wise, media, software and telecomms were the big winners of the AI/computing frenzy, as domestic investors rushed back into these sectors, with value/cyclical sectors underperforming on the back of a gloomy outlook for earning/growth.
The Hang Seng Index closed the week up 1.1% thanks to a late rally on Friday, with generally cautious trading following mixed economic data from China. The US debt-ceiling deal was closely watched as well.
Chinese tech shares led the rally, although Friday’s rally in US-listed Chinese American depositary receipts left them close to parity with their Hong-Kong counterparts.
There were media reports that the Chinese government was working on a series of new measures to support the property market, refining and extending the 16-point rescue package introduced in 2022.
Looking at the sectors, AI stocks rallied after Baidu said it was going to set up a CNY1 billion investment fund to promote AI development, semiconductor stocks extended the rally on the AI frenzy sparked by Nvidia’s bullish outlook for AI applications, and the education sector rose after President Xi Jinping called on top officials to boost a “high quality” education system that would strengthen China’s development.
Last week was decent for Japanese equities after a late rally on Friday drove the Nikkei up 1.97% on strong domestic earnings and yen weakness.
Bank of Japan (BoJ) Governor Ueda said it was premature for the bank to discuss details of an exit from its ultra-easy monetary policy and that there was no set time frame for achieving its 2% inflation target, given uncertainty about the outlook for prices. He continued to emphasise the need for central banks to be more careful about how they communicate. Market speculation has continued about the possibility of a snap election in Japan, which is seen as delaying the BoJ’s exit from easy monetary policy.
Despite its recent weakness versus the US dollar, the yen had a somewhat better week. Officials have now stated that they will closely watch currency moves and respond appropriately as needed, not ruling out any option available if necessary.
There was good news for the tourism sector last week, as data showed the more than 10 million foreigners reported overnight stays in the country’s hotels and other accommodation facilities in April for the first time since the pandemic outbreak. The weaker yen, an increase in international air traffic, and the start of Japan’s cherry blossom season all played a part in the increase.
Sector-wise, pulp paper, automotive and real estate stocks led the way higher, while shippers and airlines underperformed.
The week ahead
Holidays
Monday 5 June: Greece; Denmark
Tuesday 6 June: Sweden
OPEC+ (which includes Russia) met over the weekend. Saudi Arabia announced an output cut of one million barrels per day in order to prop up oil prices. The rest of the 23-nation group offered no additional action but did pledge to maintain their existing cuts until the end of 2024. Oil prices have continued to bounce this morning.
Key Events
Sunday 4 June
OPEC+ meeting, including Russia
Monday 5 June
China: Caixin Services PMI
United Kingdom: New Car Registrations, Official Reserves Changes, S&P Global/CIPS UK Services/Composite PMI
EU: S&P Global Eurozone Composite/Services PMI, Sentix Investor Confidence, Producer Pruce Index (PPI)
France: S&P Global France Services/Composite PMI, Private Sector Payrolls
Germany: Trade Balance, Exports/Imports SA, S&P Global Germany Services/Composite PMI
Italy: S&P Global Italy Composite/Services PMI
United States: S&P Global US Services/Composite PMI, ISM Services Index/Prices Paid/Employment/New Orders, Factory Orders/Ex Trans, Durable Goods Orders/Ex Transportation, Cap Goods Orders Nondef Ex Air
Tuesday 6 June
United Kingdom: BRC Sales Like-For-Like, S&P Global/CIPS UK Construction PMI
EU: Retail Sales
Germany: Factory Orders/WDA, S&P Global Germany Construction PMI
Wednesday 7 June
France: Trade Balance, Current Account Balance, Total Payrolls
Germany: Industrial Production SA/WDA
Italy: Retail Sales
United States: MBA Mortgage Applications, Trade Balance
Thursday 8 June
United Kingdom: RICS House Price Balance
EU: GDP SA, Govt Expend/Gross Fix Cap, Household Cons, Employment
Italy: Bank of Italy Reports on Balance-Sheet Aggregates
United States: Consumer Credit, Initial Jobless/Continuing Claims, Wholesale Inventories/Trade Sales, Household Change in Net Worth
Friday 9 June
China: Aggregate Financing & Money Supply
Italy: Industrial Production/WDA/NSA
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