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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.

Equity markets edged higher again last week, but gains were smaller than in recent weeks and there was a more cautious feel to sentiment. Expectations around a US/China trade deal remain a central focus for investors, with markets reacting to nearly every headline. Elsewhere, global macroeconomic data was mixed. In Europe, focus centred on political developments in Spain and the United Kingdom. Aside from the trade talks, events in Hong Kong dominated in Asia.

The Digest

Spain’s New Government Slides to the Left

After last weekend’s Spanish general election failed to provide a clear winner, the country’s centre-left PSOE party and the far-left Podemos announced they would look to form a minority government.

A “grand coalition” between the PSOE and the People’s Party (PP) had been touted earlier in the week, despite both parties formerly ruling that out. But, it was the far-left Podemos and the PSOE who reached an agreement through the week. The coalition is not a done deal and needs to be approved in a vote by parliament.

If approved, Podemos would have up to four ministers in government and Pablo Iglesias, the party’s leader, would be appointed deputy prime minister. The combination of PSOE and Podemos only yields 155 seats, well short of the 176 required for a parliamentary majority.

In order to take power, the coalition would need to gain the support of the Catalan separatist parties. The price to pay for this support could be significant given their expected secessionist demands.

The coalition is not seen as market-friendly, so as news of the coalition started to break, Spanish equities underperformed broader European peers. Spanish bank stocks have been particularly weak.

Such a coalition would rely on secessionist parties to form a government and pass laws. Also, Podemos’ ideology is anti-capitalist, with an agenda for increased public social spending and tax increases across the board.

Several commentators have suggested December 3 as the likely date for the coalition approval vote, but it may happen sooner.

UK Election Trail

The noise around the UK general election continues to heighten as we are now less than a month from polling day (December 12). While the Conservative Party continues to lead in the opinion polls, Labour has seen its support creeping higher as well. From a market perspective this is something to watch closely, as UK assets do not appear to be pricing in any increased risk of a hung parliament or a Labour government.

If Labour support continues to trend higher, we would expect investor nervousness could impact UK assets. We think the most market-friendly result would be a Conservative majority, as it gives a clear route to the UK’s departure from the European Union (EU) in an orderly fashion on January 31, 2020, and avoids a left-wing Labour government led by Jeremy Corbyn. That said, there is still plenty of time for twists and turns on the campaign trail and we saw in 2017 how a large poll lead can swiftly evaporate.

Last week, news that the Brexit Party would not contest 317 existing Conservative seats prompted a spike in both sterling and UK domestic stocks. The development was seen as boosting the chances of a Conservative majority. Since that news, the polls have seen the Conservative Party increase its support, seemingly at the expense of the Brexit party.

Conservative and Labour Both Promise Higher Spending

What is notable about this campaign is the ever-larger promises of increased public spending from both the Labour and Conservative Parties.

While government bond yields remain so low, these pledges of increased spending are not as costly as they would have been in the past. However, should yields creep higher, these inflated spending figures could see costs increase sharply.

Last Week


European stock markets saw their sixth straight week of gains in a week of ups and downs, on the back of mixed trade and political headlines. Despite the gains, performance was muted compared with equities in the United States.

There was a small reversal of the switch from growth/momentum names to value/cyclical stocks we’ve noted in recent weeks. Moves in bond yields largely drove the reversal as the European Central Bank (ECB) signalled a pause for breath on further stimulus. Autos, basic resources and banks were the worst performing sectors, while real estate and food & beverages benefitted.

Sentiment around Brexit has improved, and the latest quarterly earnings reports out of Europe are looking better than had been feared.

There was also some better macro data. Germany’s gross domestic product (GDP) growth figures were better than expected, averting a technical recession for the moment.

Spain’s stock market was the clear underperformer given the political situation, while the French stock market was the week’s outperformer.

European equities’ saw a respectable performance last week, but remain stubbornly below records as other global markets hit new all-time highs. However, given the long-term underperformance versus global peers and the recent supportive efforts from the ECB, European equities are looking more attractive to many investors.

In addition, some European data points have managed to beat estimates recently, leading some investors to consider that European purchasing manager index (PMI) data may be bottoming out ahead of a recovery for the region. We get global PMI data this Friday, which should be an important consideration given the current backdrop.


It was a quiet week for US markets in volume terms, but they continue to set new all-time highs as the market continues to use the “progress” on trade talks as a bullish catalyst.

The value-rotation trade slowed this week. We saw a bit of a chase in growth sectors, with technology stocks enjoying a relief rally. Defensives outperformed as health care, real estate investment trusts (REITs) and utilities finished last week higher. Energy stocks lagged on the week after an International Energy Agency (IEA) report predicted “calm” oil markets in 2020 amid soaring supplies from non-OPEC countries.

On the economic front, the data continues to come out better than expected. However, expectations have been at trough levels. US Federal Reserve Chair Jerome Powell also spoke twice this week, insisting that the trajectory for economic growth is heading the right way and the US economy remains sound. Outside of equities, US Treasuries saw a wave of selling as the 10-year Treasury yield rose close to 2% but settled in at 1.83%.

Trade headlines were toing and froing once again through last week. Expectations are for some kind of “phase one” deal before the implementation of the next round of tariffs on December 15. This optimistic sentiment was compounded on Friday after positive commentary from US Economic Advisor Larry Kudlow. He said negotiations with China were in their final stages and both sides were in close contact.

US Secretary for Commerce Wilbur Ross also commented that a deal would be agreed “in all likelihood”. Despite these statements from officials, US President Donald Trump continues to manage the relationship in his own fashion. He stated tariffs on Chinese goods would be “raised very substantially” should the two sides fail to strike a deal.

However, Trump did say late on Wednesday that trade talks were moving “very rapidly”. There was some speculation around whether or not European car manufacturers would remain in the US crosshairs, with some observers suggesting investment from European automakers into the United States has calmed the situation for now.


Asian equities were weaker overall. Hong Kong was the notable laggard amid further escalation in protests there. Chinese equities were also weaker, as poor economic data certainly didn’t help. In terms of sectors, defensives underperformed, with utilities and REITs both down. Technology (the year-to-date outperformer in Asia) was the outperformer last week, bouncing on Friday amid trade hopes.

The pro-democracy protests in Hong Kong continue to be a major concern for financial markets, with no clear sign of any de-escalation. Riots within the central business district forced many businesses to temporarily shut down, fuelling fears of an even greater economic impact. The concern about the protests was compounded somewhat on Friday when the region’s third-quarter GDP report showed a fall of 2.9%, its sharpest decline since the global financial crisis.

Hong Kong’s Chief Executive Carrie Lam said that restoring order remains the government’s primary objective. Focus remains on District Council elections on November 24.

In terms of data, Chinese industrial production came in below expectations, and Chinese retail sales also came in weaker than expected. The weak reports raised fears that Chinese GDP growth would fall below 6%.

Week Ahead


  • We can expect plenty of noise on policies and polls from the United Kingdom as the December 12 general election approaches.
  • Hong Kong protests and the impact on the region’s economy will remain in focus.

Monetary Policy

  • We hear from several ECB speakers throughout the week, but the highlights will likely be the central bank’s account of its October meeting on Thursday, and President Christine Lagarde’s address on Friday. Lagarde gave little away in her last address, so investors will be watching closely for hints on her thinking on monetary easing moving forward.
  • There are a number of US Fed speakers throughout the week, and on Wednesday we get the minutes from the latest Federal Open Market Committee (FOMC) meeting.

Economic Data

The focus this week will be Global Manufacturing and Services PMI data on Friday. The numbers from Europe will be under scrutiny as some anticipate a turnaround. This will also play into what we see on the growth/value rotation.

  • Europe: Euro area new car registrations and Italy industrial production (Tuesday); UK public sector net borrowing (Thursday); Euro area Markit PMI, Germany third-quarter final GDP (Friday).
  • US: Housing starts (Tuesday); Initial jobless claims (Thursday); Markit PMI (Friday).
  • Asia: Japan trade balance (Tuesday); Japan machine orders and consumer price index (CPI) (Thursday).



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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 18 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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