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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. 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.

Last week saw further gains for equity markets as hopes of a US/China trade deal continued to build. Elsewhere, market participants suffered from information overload amid a deluge of third-quarter corporate earnings. In Europe, elections in Spain and the campaign trail in the United Kingdom were in focus.

The Digest

Positive Commentary on Trade Fuels Market Rotation

Last week saw a number of positive comments from the US/China trade talks that raised hopes of a deal. This underpinned equity market performances. So-called “risk-on” sectors performed well and value names benefitted from rotation once again.

During the week, the Chinese Ministry of Commerce said trade talks had resulted in an agreement to the gradual phasing out of existing tariffs as part of a Phase One deal.

In addition, US Commerce Secretary Wilbur Ross also promised Huawei waivers would be in place soon. He also suggested tariffs on European autos would not be needed.

Nevertheless, US President Donald Trump has since poured cold water on the positive comments last week, stating that despite China’s eagerness for a tariff rollback, he hasn’t agreed to anything. However, last week, the markets largely focused on the positives.

These positive headlines, along with some better macro data last week and ongoing dovish central bank sentiment, were enough to trigger further rotation into under-owned value assets.

In Europe, we saw value names favoured over momentum names, which were down on the week. The best-performing sectors in Europe were the autos and banks. Comments from the German government calling for closer eurozone banking union aided the latter.

Spanish Election: Sanchez’s Gamble Backfires

Last weekend saw Spain’s fourth election in as many years. But the political stalemate looks set to continue.

Acting Prime Minister Pedro Sanchez (a Socialist) called the election, hoping it would end the impasse in Spain’s parliament. In the end, this election has only served to muddy the water and has left Sanchez in a worse position.

Sanchez’s centre-left PSOE party won 120 seats (versus 123 prior). The centre-right PP fared better this time round, winning 88 seats (versus 66 prior). Centre-right party Ciudadanos saw its support collapse, winning just 10 seats (versus 57 prior), with far-right group Vox the main beneficiary, taking 52 seats (versus 24 previously). Finally, far-left Podemos took 35 seats.

With that outcome, it is hard to see a viable coalition that could form a stable and lasting government. An agreement between left-wing parties with the support of small independent parties could be possible, but it would be hard to satisfy all the different participants. Some commentators suggest a grand collation between PSOE and PP in order to avoid yet more elections, but previously both parties had ruled this out.

Spanish stocks have generally underperformed broader European equities so far this year as the political impasse has weighed on sentiment. Despite that, the Spanish economy has managed to continue growing through this period. That said, there are some signs in recent data that the picture is worsening; recent manufacturing purchasing manager index (PMI) and employment data have both been weaker than expected. We expect an even more prolonged political impasse could start having a greater effect on the economy.

Bank of England and UK Update

The Bank of England (BOE) kept interest rates on hold at its Monetary Policy Committee (MPC) meeting last week. However, two MPC members unexpectedly voted for a 25-basis-point rate cut, citing the global macroeconomic picture and Brexit uncertainty.

The pound had traded in a tight range throughout the first part of the week, but moved slightly lower after the meeting. The BOE also forecast downgrades to growth and inflation.

In line with what we have seen from sell-side analysts, the BOE seems to think the no-deal Brexit risk has fallen markedly. However, there is still strong conditionality on Brexit in the guidance from both analysts and the central bank, with any policy communications from the latter contingent on the outcome of next month’s election. Because of this, in the near-term the MPC now has a new rate-cut bias. It suggested monetary policy may need to reinforce the expected recovery “if global growth fails to materialise or if Brexit uncertainties remain entrenched”.

However, in the long-term, the bank’s rate-hike bias continues, with the MPC saying that if the economy “recovers broadly in line with the MPC’s latest projections, some modest tightening of policy” would likely be needed.

It’s also worth noting that last week one prominent ratings agent put the UK’s sovereign credit rating on negative outlook. The ratings agency justified its decision by saying that the UK’s ability to set policy has weakened over the prolonged Brexit saga, along with its commitment to fiscal discipline.

On Monday of this week, UK gross domestic product (GDP) data showed the country has avoided recession, but is growing at its lowest rate since 2010.

Last Week


European markets were higher across the board last week. Autos led the way higher on the back of style rotation and positive trade sentiment. Basic resources and banking stocks also outperformed. Equities in Spain underperformed in the run-up to the general election at the weekend. In the United Kingdom, large-cap stocks made more muted gains given the political noise and cautious update from the BOE.

German industrial production slumped in September, heightening concerns that the European powerhouse could be heading for a recession. There was a bright spot on Friday, however, as German exports rebounded, providing an unexpected boost to the struggling economy. GDP figures are expected from Germany on Thursday (November 14) and will be closely watched as another contraction has been widely expected.


US equities traded higher overall last week. New all-time highs were hit on Thursday, in a week of to-ing and fro-ing with regards to headlines on trade.

Third-quarter earnings season wound down in the United Sates, with results generally coming in ahead of expectations.

US Treasury yields rallied, with the US 10-year yield back up towards the 2% level. The dollar was stronger, with better-than-expected economic data offering support. In terms of sectors, the defensives, such as utilities and real estate, lagged. Meanwhile, financials, energy and materials finished the week in positive territory.

With the vast majority of corporate earnings in the rear-view mirror, focus now fully turns back to geopolitics: tariffs, President Trump’s possible impeachment and the 2020 election. We also expect plenty of economic data towards the end of this week – market participants will be watching for any further direction around monetary policy.


Asian equities were broadly higher last week. The week started with a positive tone as rhetoric around trade raised hopes that a Phase One deal between China and the United States was nearing completion. The sector themes were near identical to the United States and Europe, with materials and financials outperforming at the expense of real estate, utilities and consumer staples.

Japanese equities were the region’s outperformer, despite strength in the yen. The main reason for the outperformance stemmed from reports that Prime Minister Shinzo Abe had instructed the Bank of Japan (BOJ) to proceed with further stimulus to fight the global economic slowdown.

BOJ monetary policy meeting minutes (released on Wednesday) hinted that board members were already considering additional easing measures. Also, a manufacturing sentiment release on Thursday reflected a fall to its lowest level since March 2013, somewhat supporting the BOJ narrative.

Protests in Hong Kong remain a focus for investors. Hong Kong equities traded lower on Monday this week, reversing all of last week’s gains after an escalation in the protests over the weekend. With economic data such as visitor numbers already affected, the ongoing impact on financial markets in Hong Kong remains a concern.

In other data, Chinese trade data out on Friday looked better, with exports largely unchanged from September and imports down slightly.

Meanwhile, the Australian trade surplus nearly hit a record high on Thursday as iron-ore shipment rose. However, Australian construction activity remained in contraction territory as the slowdown in building activity continues there.

Week Ahead


  • The fallout from the weekend’s election in Spain will be closely watched this week as we see whether the country is heading for yet another election.
  • We can also expect plenty of noise on policies and polls from the United Kingdom as the December 12 general election approaches
  • The United States is set to impose auto tariffs on the European Union on Wednesday.

Monetary Policy

  • There are a number of US Federal Reserve speakers throughout the week, with chair Jerome Powell due to address the joint economic committee of the US Houses of Congress on Wednesday. We will hear from a number of Federal Open Market Committee members the following day.
  • Several European Central Bank (ECB) speakers are scheduled this week.

Economic Data

It’s a busy week for European macro data, including a slew of UK data throughout the week and German GDP on Thursday.

  • Europe: UK Unemployment, German ZEW survey (Tuesday); UK consumer price index (CPI) & Retail Price Index, Euro-area Industrial Production, German CPI Inflation (Wednesday); Euro-area GDP & Unemployment, German GDP, UK Retail Sales (Thursday); Euro-area Trade Balance & CPI Inflation (Friday).
  • US: CPI Inflation, Fed Budget (Wednesday); Empire Manufacturing, Industrial Production, Retail Sales (Friday).
  • Asia: Japan Machine Tool Orders (Tuesday); Japan GDP (Wednesday), China Industrial Production & Retail Sales (Thursday); Japan Industrial Production (Friday).

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 11 November 2019, 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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