by Franklin Templeton Investments blog, Franklin Templeton Investments
Last week, global equities enjoyed a strong start to the second quarter. Most major indices closed the week higher and all major European indices traded above their 200-day moving averages. Mixed macroeconomic data from Europe failed to dampen spirits. Better data from China, as well as trade optimism, rising bond yields and higher oil prices boosted the autos, banks and basic resources sectors. On the other hand, the defensive spaces underperformed as risk sentiment improved. It was a similar story in the United States and the APAC region, with major indices higher across the board and a risk-on tilt to sector performance.
The Digest
Brexit: Another Week But Still No Clarity
After more rounds of UK Parliamentary votes last week, there is still no resolution to the Brexit saga.
Where are we now?
- To avoid a hard Brexit, UK Prime Minister Theresa May has sent a letter to European Council President Donald Tusk requesting a further Brexit delay until June 30, 2019.
- May made it clear the UK government still aims to ratify the withdrawal agreement and therefore leave the European Union (EU) before May 22, 2019, so that it would not have to take part in the European elections planned for May 23-26, 2019.
- If the delay does extend beyond May 22, however, the UK would participate in the elections and so the government will begin preparations for that vote. This is important in convincing the EU to grant such an extension.
- On Friday, Donald Tusk suggested a longer delay (up to 12 months), with a flexible end should the United Kingdom withdraw early. All other EU member states would have to agree, however, and the UK would have to accept it.
- There will be an emergency summit on Wednesday (April 10) at which the remaining 27 EU members will decide whether to grant an extension.
- In addition, May and Labour Party leader Jeremy Corbyn have been in discussion to try to find a unified approach to Brexit. According to a number of commentators, a customs union model looks to be the most likely outcome of these talks.
What does this mean for markets?
Mayâs request for a further extension and softening of her stance regarding the upcoming EU elections seems to be helping to contain the risk of a hard Brexit in the eyes of investors.
Despite uncertainty being prolonged, markets are resilient and, as weâve noticed in recent weeks, the market does not seem to be pricing in a hard Brexit.
The FTSE100 Index reached year-to-date highs last week, and the pound remained resilient, holding above 1.30 vs. the US dollar.
While the market appears to be showing resilience, we see some other tail risks to be aware of.
The risk of a general election has risen, and with this the so-called âCorbyn-riskâ has increased. Should Jeremy Corbyn win a general election, the concern is that markets could potentially react negatively to his left-leaning economic policies.
As always, we will be keeping an eye on UK macroeconomic developments, with consumer confidence for the region looking shaky.
Back in June 2015, UK consumer confidence had reached its highest level since the beginning of 2000, but it lost significant ground in the run-up and aftermath of the June 2016 vote. Despite a small rebound after thisâhelped by an uptick in real wagesâthe drawn-out EU withdrawal process has seemingly begun to weigh on confidence again.
Trade Optimism Grows
Optimism around the US-China trade negotiations helped investor sentiment last week, with talks shifting from China to the United States.
President Donald Trump met Chinaâs Vice Premier Liu He in Washington on Thursday. There had been some speculation that Trump might announce plans for a summit with Chinaâs President Xi Jinping following the meeting.
Such an announcement would have sent a clear message that the contentious talks may be approaching a conclusion, but confirmation of a summit failed to materialise.
There were still several positive headlines, however. We heard from Trumpâs economic advisor Larry Kudlow after the meeting. Kudlow claimed âgood headwayâ was being made.
In addition, Executive VP for Internal Affairs in the US Chamber of Commerce Myron Brilliant announced that the negotiations were currently in the âendgame stageâ.
Trump himself said on Thursday that a deal was close and could be announced within four weeks. He also warned Beijing that it would be difficult to allow trade to continue without a pact. We also heard from Chinese Vice Premier Liu, who said late on Thursday that a consensus had been reached on the text of the deal. On top of this, President Xi Jinping said there had been substantial progress.
That said, there were few details on some of the more contentious issues, so this is something to continue to watch.
Last Week
Europe
European markets saw a strong start to the new quarter. As in the United States, cyclical sectors outperformed and defensives lagged. Hopes of progress in US/China trade talks and the encouraging global macro data from the United States and China helped sentiment.
In Europe, last week was an interesting one for macro data. On Monday, German manufacturing purchasing managers index (PMI) data missed expectations, and this in turn weighed on the broader eurozone reading.
Wednesday saw better-than-expected macro data in Europe, with a number of PMI readings beating expectations.
Thursday saw a notable miss in the German factory orders for February. The German Economy Ministry said: âManufacturing momentum will continue to be subdued in the coming months, particularly due to lacking external demand.â
This made the weekly gains in German stock markets all the more impressive, with markets seemingly happy to take their lead from the mood around global trade rather than this data.
Americas
It was an impressive first week of the new quarter for US equity markets, with indices gaining across the board.
With signs of progress in the trade talks and supportive macro data, cyclicals led the market higher. The best-performing sectors were materials and financials. In a risk-on market, defensive sectors lagged.
Looking at the macro data, several data points were reassuring. Earlier in the week, the retail sales, ISM manufacturing and durable goods numbers were all in-line-with or slightly better than expected.
On Friday of last week, the all-important monthly employment data were particularly in focus this month given the large miss we saw last month. The data were encouraging, with nonfarm payrolls higher than expected and the unemployment rate in line with expectations.
Otherwise, it is worth noting President Trump renewed his criticism of the US Federal Reserve (US Fed) last week. He said the Fed should embark on âquantitative easingâ which he said would turn the economy into a ârocket shipâ.
Asia
It was a quieter week for Asian markets, thanks to holidays in China and Hong Kong on Friday. But the region still saw gains for equity markets.
The US/China trade talks were of course the main talking point for the region, as covered above. However, there was some positive Chinese macro data that helped galvanise sentiment as well, including manufacturing and services PMI data that came in ahead of expectations.
In Australia, the Reserve Bank of Australia (RBA) left interest rates on hold at 1.5% as expected, but the bank has a dovish bias. The markets see a 75% chance of an RBA rate cut by the end of 2019.
In Japan, we saw Composite PMI and Service PMI both come in slightly below expectations.
Week Ahead
It promises to be another busy week in European and UK politics, with the emergency Brexit summit and potential Brexit crash-out date this week.
Wednesdayâs European Central Bank (ECB) meeting is keenly anticipated, thanks to some hopes of measures to support European banks.
Key interest for the banking sector will be around the Deposit Facility Rate where there has been speculation and hopes around a possible change to the policy following comments from ECB officials. Introducing âtieringâ would reduce the cost to banks of depositing cash with the ECB.
However, early this week, some headlines suggested the ECB has not discussed tiering options and is in no rush to revamp its policy.
The latest Federal Open Market Committee (FOMC) minutes will be released on Wednesday and should garner plenty of attention.
In addition, earnings season kicks off again in the United States and Europe towards the end of the week. On the macro front, inflation data from the United States and United Kingdom will be in focus.
Macro
- Europe: German Trade Balance (Tuesday), French and Italian industrial production (Wednesday), UK gross domestic product (Wednesday)
- US: Factory Orders (Tues), consumer price index (CPI) (Thursday), producer price index (PPI) data (Friday)
- APAC: China Money Supply (Monday), China CPI (Friday)
Politics
- EU leaders Brexit summit takes place on Wednesday April 10.
- April 12 is current deadline on which the UK crashes out of the EU should no extension be granted, or no deal reached.
- We can expect further trade headlines throughout the week.
Monetary Policy
- The big focus will be the ECB meeting and the subsequent press conference on Wednesday, April 10.
- We also get the latest FOMC minutes on Wednesday.
- Bank of Japan governor Haruhiko Kuroda is due to speak on Thursday.
- The Italian government is set to publish its stability programme on Thursday.
Views You Can Use
Insight from Our Investment Professionals
In the face of slowing economic growth, the Chinese authorities appear ready to act. Franklin Templeton Emerging Markets Equityâs Sukumar Rajah and Jason Zhu explain how measures announced at the 13thNational Peopleâs Congress are designed to shore up Chinaâs growth prospects. Read More.
On My Mind: Trade WarsâThe Dog That Didnât Bark
The prospect of a âtrade warâ between the United States and China has caused some investor trepidation over the past year. But are the fears of economic fallout from this âwarâ warranted? And, was there ever really a war at all? Franklin Templeton Fixed Income CIO Sonal Desai weighs in. Read More.
The Pace of Innovation and Disruption Is AdvancingâWhat Does This Mean for Investors?
With so much new technology adopted into our everyday lives, what will stand the test of time, and what will simply be a passing phase? Franklin Equity Group Vice President Matt Moberg argues why active management is crucial to weeding out the life-shaping technologies from the hype. Read More.
Is the US Yield Curve Signalling a US Recession?
There has been a lot of talk recently about the possible inversion of the US yield curveâwhich is a graphical representation of the spread between short- and long-term interest-rate instruments. Our senior investment leaders make a case that the âpredictive powerâ of the yield curve when it comes to the US economy may not really be so predictive this time around. Read More.
For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.
Important Legal Information
This article reflects the analysis and opinions of Franklin Templetonâs European Trading Desk as of April 8, 2019, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton Investments. 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.
Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (âFTIâ) has not independently verified, validated or audited such data. FTI 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 FTI 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.
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.
Links to External Sites
Franklin Templeton Investments is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the siteâs owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
Copyright © Franklin Templeton Investments
