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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.

Equity markets struggled for direction last week as uncertainty over US-China trade talks weighed on sentiment. While commentary from the trade talks often sounded promising, an escalation in violent protests in Hong Kong and subsequent US Senate support for the protesters prompted an angry response from China. With that, we saw equities markets drift somewhat.

The Digest

US/China Trade Talks in Focus

Last week saw new strains in the US-China trade talks as the US Senate passed a bill supporting the protesters in Hong Kong. The bill warned China against any violent suppression of protests in Hong Kong. US Vice President Mike Pence also weighed in, saying a trade deal would be difficult if China were to mistreat protestors.

The Chinese response was one of anger. Hong Kong officials expressed “extreme regret at the bill”. Any escalation of China’s response to the Hong Kong protests appears to be intertwined with the trade talks now. We expect this tension will be an important dynamic in the coming weeks.

Despite this tension, the talks continue and China stated it was striving to reach a “phase one” deal. US Commerce Secretary Wilbur Ross, said there remained hope a deal could be done.

Markets opened higher in early trading this week on Chinese comments that it plans to raise penalties on intellectual property (IP) violations, as it tries to smooth over one of the key sticking points in trade talks with the United States. Beijing will also look into lowering the thresholds for criminal punishments for those who steal IP.

December 15 is a crucial date. It’s when US tariffs on US$156 billion of Chinese goods are due to take effect. We would imagine the Chinese authorities will look to reach a deal by this deadline.

Europe PMI Data Fails to Inspire

Last week’s most important European macroeconomic event came on Friday, namely the release of the latest purchasing manager index (PMI) data from the region.

Many observers anticipated an uptick in the euro area PMIs, given that other recent data has been improving. While the rate of deterioration in manufacturing did slow in November, leading some to believe that the worst of the downturn is over, the figures for Germany and the eurozone remained in contraction.

Germany also saw a fifth straight month of decreases in new orders, reinforcing the sense that while the pace of the decline has slowed, contraction persists.

German and eurozone services PMIs also weakened, coming in below economist expectations and signalling a potential stagnation of growth in the fourth quarter of 2019. Things looked more encouraging in France, where PMIs remained steady and the accompanying press release referenced a moderate improvement in international demand.

The UK PMI figures were pretty dismal as the political uncertainty continues to weigh on domestic demand. The manufacturing PMI contracted more than expected and services moved into contraction territory from a flat reading. This weaker data puts the United Kingdom on course for a 0.2% drop in gross domestic product (GDP) in the fourth quarter.

Christine Lagarde echoes Draghi’s message

We also heard from Christine Lagarde last week, in her first proper address as the new president of the European Central Bank (ECB).

While there were no surprises in terms of policy signals, we felt it was important that Lagarde reiterated the need for fiscal stimulus from individual countries in order to support domestic demand.

Using almost the same language as her predecessor Mario Draghi, she said: “It is clear that monetary policy could achieve its goals faster and with fewer side effects if other policies were supporting growth alongside it.”

Interestingly, last week saw confirmation the conservative German government had increased third quarter government spending by 80 basis points. We think it will be important to see if this continues in the coming weeks and months.

UK Election: Manifesto Plans in Focus

There was increased focus on the UK election campaign this week, with Prime Minister Boris Johnson and Labour leader Jeremy Corbyn coming together in a live TV debate on Tuesday night. In addition, Labour launched its election manifesto on Thursday.

The live debate came and went without incident.

The Labour manifesto was delivered on Thursday and it pushed a strong left-wing economic agenda. A windfall tax on the UK oil industry as well as a strong message around the nationalisation of water, energy, rail, mail and broadband were two of the items which grabbed most attention.

The latest opinion polls still have the Conservatives more than 10 percentage points ahead and on track to secure a majority in parliament.

If we see any tightening of the polls between Labour and the Conservatives, we can expect UK assets to come under pressure given the details of Labour’s manifesto.

The Conservative party released its manifesto over the weekend. Despite some of the rhetoric on the campaign trail about heightened spending, there is little content in this manifesto on this subject.

For example, while the party had pledged to “solve the social care crisis”, there is no detail on how this would be funded. In our analysis, it seems the manifesto is designed to avoid “rocking the boat”. The key message from the Conservatives remains a commitment to delivering Brexit by the end of January.

Potential Speed Bumps for Santa Rally?

Looking a little further ahead, it is worth flagging our expectation that the week of December 9 to 13 is shaping up to be a crucial period for market sentiment into the year-end.

A number of potentially market-moving events are scheduled for that week: The US Federal Reserve’s Federal Open Market Committee meets on Wednesday December 11; Lagarde’s first ECB meeting and the UK election take place on December 12; and an EU summit is scheduled for December 12 and 13, where we could see further commentary around a proposed banking union.

Furthermore, if no trade agreement is in place by Sunday, December 15, we hit the next deadline for fresh US tariffs on Chinese imports. Given the moves equity markets have had year to date, if we do get any shocks, is there a risk we see profit taking as investors try and lock in performance before volumes die off into year-end? We would certainly expect volatility through that period.

Last Week


European equities closed lower last week after staging a recovery on Friday, on the back of the manufacturing PMI reports. It was a reasonably choppy week, with drivers coming from outside the region. US-China trade tensions as well as the continued political unrest in Hong Kong received most of the focus.

Italy was the region’s notable underperformer last week. Italian stocks missed out on Friday’s rally amid reports that the country’s ruling parties failed to reach an agreement over a planned reform of the eurozone’s bailout fund. Investors appeared to see this as an opportunity to move into year-to-date underperformers, with Spain well-bid.


US equities fluctuated over the course of the week, buffeted by trade headlines and economic releases. Major stock indices ended the week slightly lower across the board. This ends a six-week winning streak for the Standard & Poor’s 500 Index, the longest in two years.

We saw some consolidation of the recent rotation into cyclicals alongside a bounce in the US dollar and a drop in US Treasury bond yields.

It was a quiet week for US macro data, but we expect Black Friday (the start of the holiday shopping season) this week to be a big test for the appetite of the US consumer this week.

On the political front, the impeachment threat still hangs over President Donald Trump. House Intelligence Committee Chairman Adam Schiff said the investigation would continue even after the initial report is filed.

Looking ahead to the 2020 election, in a development over the weekend, former New York City Mayor Michael Bloomberg has announced that he will throw his hat into the race for the Democratic party presidential nomination in order to fight Donald Trump. Bloomberg is said to believe the current Democratic candidates are not well positioned to defeat the current president. As a former Republican, he will be running as a centrist Democrat. Given an apparent drop in support for moderate Democratic candidate Joseph Biden, investors should likely welcome another more market-friendly option on the Democratic side.


Markets in the Asia Pacific (APAC) region put in a mixed performance last week. Stocks in Hong Kong proved to be the week’s winners despite continued protests. It felt as though we were seeing some reversion following a dire performance the prior week.

Meanwhile, Japanese stocks underperformed with little news flow to go on last week.

Despite trade headlines weighing midweek, losses in mainland China were muted, as intervention from the People’s Bank of China (PBOC) helped sentiment on Monday.

In addition, investors have been digesting the results of local election in Hong Kong. Pro-democracy parties have emerged victorious in a landslide victory, with at least 17 of the 18 districts in the city going to pro-democracy candidates. In all, the pro-democracy candidates have won 86% of the 444 available seats. After months of pro-democracy protests, this will apply pressure on Carrie Lam and her government to consider protester’s demands. Lam herself acknowledged that vote reflects people’s dissatisfaction.

Week Ahead

Economic Data

  • In Europe: German consumer confidence figures on Tuesday; French and Italian consumer confidence on Wednesday; eurozone economic confidence and German consumer price index (CPI) data on Thursday; eurozone CPIs, unemployment rate, French and Italian GDP on Friday.
  • In the US: inventories, new home sales on Tuesday; GDP and Jobless Claims on Wednesday.
  • In Asia and Pacific: Japanese retails sales on Wednesday; Japanese jobless rate on Thursday; Japanese housing starts on Friday.


  • We expect political posturing to continue in the United Kingdom through the week as Labour tries to cut the Conservatives’ lead in the polls.

Monetary Policy

  • Fed releases the Beige Book on Wednesday.
  • We expect ECB speakers every day this week.


  • US markets will be closed on Thursday for the Thanksgiving holiday, so we can expect market volumes to tail off into the end of the week.



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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 25 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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