Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their 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

Equities were volatile last week as political drama took centre stage, with the noise around the US presidential debate and President Donald Trump’s COVID-19 diagnosis dominating investor focus. In Europe, continuing Brexit negotiations and increasing COVID-19 restrictions were focal points. It was a much quieter week in Asia, with several market holidays across the region. The week ended on a positive note, with the MSCI World Index up 1.5%, the Stoxx Europe 600 Index up 2%, the S&P 500 Index up 1.5% and the MSCI Asia Pacific Index up 0.7%.

As we entered the final quarter of 2020, here are the year-to-date (YTD) performances: Stoxx Europe 600 Index down 13%; MSCI Asia Pacific Index unchanged; S&P 500 Index up 1.9%; NYSE® FANG+ Index (NYFANG) up 70%. We have touched on the environmental, social and governance (ESG) theme in previous updates and it’s worth noting that during the third quarter, global ESG funds saw their best quarter of inflows ever.

Brexit Talks Not at a Complete Dead-End at Least

There was a lot of noise last week around the continuing Brexit negotiations amid the last week of scheduled talks between the United Kingdom and the European Union (EU). Key sticking points include state aid, fisheries access, and other “level playing field” standards for business. While there was a lot of posturing and no breakthrough, it is encouraging that talks will continue.

The tone wasn’t all doom and gloom, as European Commission (EC) President Ursula von der Leyen stated that there is “a lot of work left to do” but “where there is a will there is a way, so I think it is worth working hard on it”. UK Prime Minister Boris Johnson and von der Leyen spoke over the weekend and agreed to broaden negotiations and speak more regularly to one another.

The United Kingdom hopes the EU will agree for talks to enter “the tunnel” soon, which essentially means they intensify talks as they near an agreement, as we saw last year.

A couple of key dates to keep in mind are the EU summits on 15 October and 31 October, which EC Chief Negotiator Michel Barnier states is a deadline for a deal in order to leave time for the European Parliament to ratify it. We expect a lot of noise and excitement as we get close to the second half of October. With the US election also reaching its climax around the same point, there is undoubtedly potential for a volatile period toward the end of October and early November.

Markets seemed optimistic last week about Brexit progress, as UK sterling traded up 1.4% against the US dollar and the Goldman Sachs UK Brexit basket GSXEUKD1 was up 5.6% week-on-week after contracting the week before (-3.4%).

Separately, we were reminded of how challenging a year this has been for the UK economy, with second-quarter gross domestic product (GDP) quarter-on-quarter down 19.8%, which was “better” than expected, but still the hardest-hit major European economy by some margin.

US Politics Take Centre Stage

There was no shortage of talking points last week in the United States, with a keenly anticipated US presidential debate, ongoing Congressional talks on fiscal stimulus, and President Trump’s COVID-19 diagnosis.

The chaotic presidential debate offered little in terms of content. There were some initial concerns that Democratic nominee Joe Biden would not be able to handle Trump’s approach, but this did not come to pass; he held his own, which was seen as a positive for his camp. The polls continue to give Biden a slight lead with less than a month until the election day.

As if the presidential debate wasn’t enough drama, we also had the news last Friday morning that Trump had contracted COVID-19. Stock index futures sold off sharply in after-hours trade and markets opened lower during the start of the regular session last Friday but steadied over the day as the news around Trump seemed more positive. Unsurprisingly, there was clearly a fear of greater volatility as the CBOE VIX futures surged after the news came out.

From a market perspective, how this impacts the election odds/polls will be key as the election draws closer. If we see a tightening of the race on the back of a “sympathy” vote for Trump, we could see fears of an uncertain election outcome weigh on markets. As we have said many times, markets hate uncertainty, so a clear result in November either way would likely be positive more for markets.

Many observers are speculating about the potential market impact of Biden victory. Some also think a Democratic-controlled Congress is possible should the Democrats pick up Senate seats. Much has been made of the corporate tax hikes we could expect under Biden as president, but we have seen some analysts make the case that the negative impact could be offset by greater fiscal stimulus and ultimately have only a modest impact on corporate profits.

Finally, talks over the stalled current fiscal stimulus package continue between the Democrats and Republicans, with House Speaker Nancy Pelosi stating she’s optimistic there’s a path to a stimulus deal. Significant disagreement remains, but is does sound that they are moving close to a deal. Demonstrating his eagerness for a deal, Trump tweeted “OUR GREAT USA WANTS & NEEDS STIMULUS. WORK TOGETHER AND GET IT DONE. Thank you!”

The Week in Review

Europe

Last week was somewhat choppy for European equities, with the focus on Brexit negotiations between the EU and United Kingdom. Monday’s rally was helped by a number of catalysts including a weaker dollar, early Brexit optimism, US stimulus optimism, vaccine hopes, better macro data from China, and some accommodative European Central Bank (ECB) language.

News of Trump testing positive for COVID-19 dominated newsflow and dented risk appetite on Friday, which caused  European equities to lose some of their gains from earlier in the week. Value outperformed momentum last week and banks and utilities stocks were particularly strong as some buyers perhaps took advantage of the previous week’s pullback. Oil and gas, health care and telecommunications underperformed.

ECB Executive Board Member Fabio Panetta raised the prospect of a pre-emptive burst of stimulus when he said “the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy.” Inflation for the eurozone fell to a four-year low, hitting -0.3% in a second consecutive month of deflation, putting further pressure on the central bank to act at its December meeting.

United States

All major US indices finished last week higher, with the focus firmly on the US election and potential stimulus package. Looking at sectors, energy underperformed on the back of weakness in crude oil and was notably the only sector in the red, down 2.9% on the week. Equities lost ground Friday on the back of the headlines regarding Trump’s COVID-19 diagnosis, together with a disappointing September employment report. We saw risk-off sentiment, and value outperformed growth last Friday. Big technology stocks underperformed, although the NYFANG still managed to close the week up 2.5% after a strong performance earlier in the week.

Macro data was mixed. The key print was the employment report for the month of September,  although this was somewhat overshadowed by the noise around Trump’s COVID-19 diagnosis. The headline nonfarm payrolls number was a touch lighter than anticipated (666,000), but this played into the case for getting a stimulus deal agreed upon as soon as possible.

September automobile sales came in better than expected as BMW said sales plants in Europe and the United States have returned to capacity, adding that consumer demand has returned faster and to a higher level than anticipated. The Institute for Supply Management (ISM) Manufacturing Index  also continued to expand at a solid rate.

Crude oil came under pressure last week, mirroring weakness in base metals. Alongside positioning, there were some incremental headlines that weighed on sentiment slightly, with Saudi Arabia keeping its crude oil output broadly stable in September (although in line with the current OPEC+ target). In addition, a lack of progress on US stimulus, general unease over OPEC discipline, and concerns that a Biden win would allow Iranian barrels into the market all played into the move somewhat. On the latter point, some analysts are flagging crude oil as the best risk barometer for a Biden win (much like the Mexican peso was touted as one for Trump in the runup to the previous presidential election in 2016). Crude oil is down 6% since last Tuesday night’s US presidential debate.

Asia Pacific

The MCSI APAC Index  closed higher last week, with a mixed performance from individual indices and a number of market closures. Mainland China’s markets were closed on Thursday for the annual Golden Week holiday and are set to re-open this Friday, whilst Hong Kong was closed on Thursday and Friday for a National Holiday. Political unrest continues in Hong Kong, with the government deploying thousands of riot police on Thursday in an attempt to battle an attempt a one of the first large scale protests from security law protestors. That said, the Hang Seng Index has reopened on a decent footing this morning. Macro data from China was positive last week and imply that a recovery is in place.

Australian equities underperformed last week amid weakness in the energy and materials sector. This morning, the Australian press has reported that the government is set to announce significant tax cut measures and infrastructure spending in Tuesday’s budget.

Week Ahead

Macro/Political

This week is shaping up to be quite busy, with focus likely on President Trump’s health and recovery, any progress on the US stimulus bill, alongside the usual Brexit and general COVID-19 concerns. The US vice presidential debate takes place on Wednesday.

On the macro front, eurozone retail sales, German industrial production (IP) and UK GDP will likely be the focus in Europe. From the United States, we get trade balance data on Tuesday. In the APAC region, the China Purchasing Managers’ Index (PMI) data will be released on Thursday.

Monetary Policy

We hear from the ECB’s Christine Lagarde on Tuesday and Wednesday, the Bank of England’s (BoE’s) Andrew Bailey on Thursday, and a number of Federal Reserve (Fed) speakers on Wednesday. The  Reserve Bank of Australia’s (RBA) also holds its monetary policy meeting  on Thursday, which will be interesting in light of the weekend press mentioned. The ECB’s August monetary policy meeting account is released on Thursday.

Calendar

Holidays: 

• Mainland China remains closed until Friday.
• Portugal closed 5 October.

Monday 5 October:

• Economic/Political: Bank of Japan’s Haruhiko Kuroda speaks, Fed’s Raphael Bostic and Charles Evans speak.
• Data: Global: (September) services & composite PMI; Eurozone: (August) retail sales; UK: (September) new car registrations; US: (September) ISM non-manufacturing

Tuesday 6 October:

• Economic/Political: ECB’s Lagarde, Chief Economist Philip Lane speak.
• Data: Germany: (August) factory orders; US: (August) trade balance, (August) Job Openings and Labor Turnover Survey (JOLTS)

Wednesday 7 October:

• Economic/Political: US Election VP debate; Federal Open Market Committee (FOMC) September meeting minutes; Reserve Bank of Australia interest-rate announcement; Riksbank’s Cecilia Skingsley speaks; ECB’s Christine Lagarde, Francois Villeroy speak; Fed Chair Jerome Powell speaks.
• Data: Germany: (August) IP; Switzerland: (September) foreign currency reserves; Italy: (August) Retail Sales

Thursday 8 October:

• Economic/Political: BOE’s Andrew Bailey speaks, ECB’s Isabel Schnabel, Pablo Hernandez De Cos speaks; ECB August monetary policy meeting account
• Data: Germany: (August) trade balance; France: (September) Banque de France industry sentiment; US: (October) initial jobless claims

Friday 9 October:

• Data: UK: (August) IP, (August) monthly GDP, (August) trade balance; France: (August) IP; Italy: (August) IP

 

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