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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 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

Global equities were broadly weaker last week, with equity funds seeing their largest weekly outflows since March. Increases in COVID-19 infections, as well as the uncertainty of the US presidential race and Brexit negotiations, are providing significant overhangs for markets right now. The MSCI World Index closed last week down 1.7%. European equities lagged, down 3.6% on the week, whilst the MSCI Asia Pacific was down 3.2%. US equities outperformed, down just 0.6% following a rally on Friday.

Resurgence in COVID-19 Cases in Europe

There continues to be a resurgence of COVID-19 cases across Europe and a marked increase in hospitalisations. Whilst second spikes were expected as we move into the colder months, it is the extent of the lockdowns and the rhetoric surrounding these announcements which spooked investors again last week.

On 22 September, there were announcements from the devolved governments in the United Kingdom which would seek to limit physical interactions. This meant re-enforced rules for pubs and restaurants and a refreshed appeal to work from home where possible. This comes at a time when new daily cases are making new highs in the United Kingdom. UK Chancellor Rishi Sunak also announced a new wage subsidy scheme, aiming to prop up the earnings of those who cannot work full-time through winter because of restrictions.

France is also in focus with COVID-19 cases at a record high. It was also reported that last week there was a 25% rise in the number of new deaths associated with the virus in care homes and hospitals. Prime Minister Jean Castex spoke through the week of the worsening situation. Paris was declared a zone of “heightened alert”, whilst bars and restaurants in Marseille were closed.

In Spain, there is a clear disconnect between central and regional governments as they both fight it out over different strategies. Madrid currently accounts for one-third of all Spain’s cases and deaths and a Bloomberg report suggested that all intensive care unit beds in the city were “almost full”.

The economic overhang caused by the latest round of lockdowns continues to dampen investor sentiment around Europe. UK Prime Minister Boris Johnson’s comments that the latest round of restrictions in the United Kingdom could last for as long as six months does not offer much hope that the prolonged economic impact of the virus will be less severe than first thought.

This week’s Purchasing Managers’ Index (PMI) data was mixed, with the eurozone composite reading coming in at 50.1, lower than expected. Services continue to be the laggard, weighed on more heavily by coronavirus restrictions, falling to a reading of 47.6 vs 50.5 previously. Manufacturing continues to lead in terms of a relative recovery, coming in at 56.6, up from 52.2 previously.

In the United States, COVID-19 cases passed seven million on 25 September as the country continues to battle its spread. Like in Europe, young adults appear to be a key demographic when looking at the spread of the virus, with the Centers for Disease Control and Prevention (CDC) reporting that 20% of positive cases over the summer in the United States came from people in their 20s. Health officials were again warning that there could be a further surge as we head into the colder months. The focus of the US government appears to be on the vaccine, with one of President Donald Trump’s advisors pinning hopes on having a vaccine by the end of the year.

Also, uncertainty remains around a stimulus package being agreed upon, with US Secretary of Treasury Steve Mnuchin and Speaker of the House of Representatives, Nancy Pelosi, set to resume talks as Democrats and Republicans seek middle ground in efforts to prop up the economy.

US Presidential Race

Investors continue to keep one eye on the US presidential election, which is now just five weeks away. Market volatility is on the rise into the event, with the November VIX futures contract at its highest level in two weeks. The Democrats are expected to retain their slight majority in the House, but the race for the Senate remains too close to call. Democratic presidential nominee Joe Biden continues to poll ahead, but polls are tightening in some key states and we could yet end up with a Trump comeback and victory like we saw in 2016. As the race remains on a knife-edge, investors are having to consider the implications of a Biden or a Trump victory and position accordingly.

When we look at the impact on a sector basis, then we understand why equity investors are feeling this uncertainty. Many observers believe a Trump win would certainly be better for stock markets overall, as economic growth and deregulation continue to be areas of focus for his administration. There is also a belief that a Biden-led administration could result in higher taxes and greater regulatory pressure for many companies amid his party’s focus on environmental concerns.

We should also be aware of the risk of a contested result, which would prolong the uncertainty of the future political landscape in the United States and undoubtedly weigh further on markets. A delayed election result could possibly be the worst outcome for stock markets, with uncertainty being the key factor. The last time we saw a delay in election results was in 2000, when the final result not decided until five weeks after the vote. At that time, the S&P 500 Index fell nearly 10% and the NASDAQ dropped 20%.

Week in Review


European equities were broadly weaker last week. The STOXX Europe 600 Index was down 3.6%, with a number of overhangs still engulfing markets. As noted, the rising number of COVID-19 cases and subsequent re-introduction of restrictive measures has dragged on investor sentiment, whilst Brexit uncertainty continues to rumble on. Value stocks underperformed in Europe last week, with the Morgan Stanley EU Value Index down 3.1%, whilst momentum stocks were the relative winners, with the equivalent index up 5.3%. France’s CAC 40 Index lagged in the region, down 5.0%, following those record COVID-19 case numbers. The exporter-heavy FTSE 100  Index was the relative outperformer in the region, but still down 2.7%, following further weakness in Sterling, down 1.3% vs. the dollar.

All equity market sectors finished in the red last week, but defensives outperformed; personal and household goods and utilities were both down just 0.8%. Banks underperformed on the week, down 7.8%, with reports of widespread money laundering weighing on sentiment, whilst the sector continues to struggle with low yields. Insurers also came under pressure on news that a law firm is preparing a case against 12 insurers who are allegedly refusing to pay out on business claims relating to COVID-19. Also, notably, travel and leisure remains unloved, but did receive some respite last week following headlines regarding mergers and acquisitions (M&A) in the gambling space.

With regards to Brexit, the consensus view is that the recent posturing over the UK Internal Market Bill did slightly diminish the chances of a deal, but not significantly. Within our broker community, the consensus view is that some form of deal will be struck at the last minute. The key headlines at the moment simply reflect the political posturing we are very used to, rather than anything of any great substance. It was reported that UK Minister Michael Gove will be in Brussels from 28 September for Joint Committee talks.

United States

A choppy week for US equities saw the S&P 500 Index eventually end last week down -0.6%. Technology indices outperformed thanks to a bounce into the end of the week, with the NASDAQ and the NYFANG Index both up 1%. The dollar strengthened amid a safe-haven play as COVID-19 concerns rose in Europe. Political stories often dominated the narrative, with the debate around the White House’s efforts to fill the Supreme Court vacancy left by the death of Justice Ruth Bader Ginsburg) in an election year taking centre stage.

Meanwhile, hopes for Congress to agree to another stimulus deal seemed to have waned. The Democrats’ proposed US$2.2 trillion package is some ways off from the Republican’s more modest proposals. From a market perspective, we think progress on this package will be a key catalyst to watch in the coming weeks.

From a sector perspective, energy financials and materials industrials, real estate and health care all declined. Technology, consumer discretionary and utilities were the only sectors that gained last week.

Elsewhere, comments from a number of US Federal Reserve (Fed) speakers garnered attention last week.

Fed Chair Jerome Powell struck a cautious tone, stating that the US economy is improving but has a long way to go before fully recovering from the coronavirus pandemic. “Many economic indicators show marked improvement, both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain”, he said.

In addition, Vice Chairman for Supervision Randal Quarles said economic risks are “weighted to the downside” given the “unusually large amount of uncertainty”, while Eric Rosengren, president of the Fed Bank of Boston, said a second wave of the pandemic and the lack of Congressional action means “the most difficult part of the recovery is still ahead of us”.

Overall investor sentiment feels more cautious as we face headwinds from US election rhetoric, fiscal stimulus stalemate, and ongoing COVID-19 concerns. US equities saw their third-largest-ever outflow of US $25.8 billion. Credit markets show signs of caution too, as high-yield credit has seen outflows rising.

The latest reading from the CNN Fear & Greed Index has seen a sharp decline from “Greed” sentiment driving markets through the summer to “Neural” sentiment, illustrating investor uncertainty.

Asia and Pacific (APAC)

Markets in the APAC region were mostly lower last week as concerns over COVID-19’s resurgence and a possible slowdown in growth weighed globally, leaving the MSCI APAC Index down 3.2% on the week. Hong Kong’s Hang Seng Index fell  5.0% while the Shanghai Composite on mainland China fell 3.6%, as tensions with the United States showed no signs of abating. Australian equities were the one bright spot, with the market benchmark gaining last week.

At last week’s United Nations general assembly, Trump very dramatically renewed calls for China to be held responsible for the COVID-19 pandemic. Chinese President Xi Jinping hit back, saying that “any attempt of politicising the issue or stigmatisation must be rejected”.

Tensions between the two countries continued to weigh on sentiment for technology stocks.  in Chinese State Media denounced a proposed US$60 billion TikTok deal (backed by Trump) as “dirty and unfair” last week. Chinese TikTok owner ByteDance and its potential US partners (Walmart and Oracle) have released contradictory statements on key details of the arrangement, with confusion who would own and control TikTok Global.

Another big talking point last week was a planned record-breaking initial public offering (IPO)  for Chinese online payment platform company Ant Group. Local brokers have been reporting strong demand. The company plans to raise at least US$35 billion, which would make it the largest IPO in history, with Saudi Aramco’s US$29 billion listing the previous record holder. Ant Group is seeking an IPO hearing in Hong Kong as early as this week after receiving approval from Shanghai regulators last week. The IPO is likely to come to market after the Golden Week holiday in October.

IPO frequency and size has been ramping up in recent weeks and 2020 could ultimately prove to be the strongest year on record for IPOs. There were 24 IPOs last week alone. However, Kioxia Holdings postponed what was set to be Japan’s biggest IPO of the year as China-US tensions continue to create uncertainty in the global technology sector, denting investor demand. Chip producer Kioxia was set to reveal pricing during today’s trading session but shelved it at the last minute, triggering a knee-jerk sell-off in 40% owner Toshiba. We also saw another steep drop in Semiconductor Manufacturing International Corporation shares in China today after the United States imposed further export restrictions.

Week Ahead


Monday 28 September:

  • Economic/Political: Cleveland Fed Bank President Loretta Mester speaks; European Central Bank (ECB) President Christine Lagarde speaks
  • Data: German import prices

Tuesday 29 September:  

  • Economic/Political: First presidential debate for the US election; Fed’s John Williams and Patrick Harker speak
  • Data: US consumer confidence; Japan Consumer Price Index (CPI); France consumer confidence; UK money supply, mortgage applications; Eurozone economic survey; Germany CPI

Wednesday 30 September:    

  • Economic/Political: Fed’s Neel Kashkari speaks; ECB’s Lagarde speaks
  • Data: China manufacturing and non-manufacturing PMIs; US employment and pending home sales; Japan industrial prices, vehicle production, construction orders, housing starts, retail sales; France CPI, consumer spending; Germany unemployment rate; Eurozone CPI; Italy CPI

Thursday 1 October:   

  • Economic/Political: Fed’s John Williams speaks; Riksbank published minutes from September meeting
  • Data: Global Manufacturing PMIs; US Institute of Supple Management (ISM) Manufacturing Index survey, initial jobless claims; Italian unemployment rate; Eurozone unemployment rate

Friday 2 October:    

  • Economic/Political: Fed’s Patrick Harker speaks; ECB’s Robert Holzmann speaks; S&P to rate German and French sovereign debt
  • Data: US September employment report; Japan jobless rate


Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including 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. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 21st September 2020, 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.

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