Notes From the Trading Desk – Europe

Global equities were higher across the board last week, with US markets making all-time highs and European equities hitting a 22-month record. The Asia Pacific (APAC) region also fared well. Trade optimism and dovish central banks were the major catalysts.

The Digest

US Equities Hit the Heights Again

Last week saw a buzz of excitement as US stock market indices made new all-time highs amid optimism around trade issues and another interest- rate cut from the US Federal Reserve (US Fed).

At its October policy meeting, US Fed Chair Jerome Powell announced a 25-basis point interest rate cut, as expected. This was the Fed’s third cut this year, for a total reduction of 75bps in its benchmark rate. Some feel the fact the Fed is lowering rates means there could be a threat of recession. So it wasn’t a surprise to us that the accompanying commentary was fairly hawkish. It felt like a more upbeat tone on the economy was needed, and Powell delivered on this.

US macroeconomic data was mixed last week, but overall supportive of Powell’s tone. Third-quarter gross domestic product (GDP) growth was better than expected (though slowing), and October nonfarm payrolls were stronger than expected. Also, while US interest rate cuts may be done for now, balance sheet expansion resumed.

US/China Talks

There was plenty of noise on trade, with the United States and China continuing to talk up progress towards a “phase-one” deal that Presidents Donald Trump and Xi Jinping could sign later this month.

There was some concern mid-week as China highlighted doubts over the possibility of a long-term trade deal, but this was shaken off on Friday as representatives said that they had reached a consensus with US counterparts on core trade concerns. The US side also issued an upbeat statement.

One caveat to note is that the hope generated by talk of a phase-one deal has the potential to be overly optimistic, especially given that we have absolutely no guidance on how many phases there will even be or whether a long-term deal lies at the end of this.

Global Underperformers Pick Up

Much of the focus has fallen on the new all-time highs for US equities, but it’s arguably more important that many global equities also made new highs as underperforming regions have picked up speed. Europe is one of the regions where we’ve seen new year-to-date highs. A bullish European narrative appears to be gaining momentum after two years of underperformance versus the United States.

There are a number of catalysts behind the return of interest in European equities, including cheap valuations and the potential for a rebound in purchasing manager index (PMI) data for the region. Such a rebound, in addition to a move higher for bond yields, could potentially boost cyclical and value stocks, which have been long-suffering underperformers.

The push towards more fiscal stimulus from the European Central Bank (ECB) is also a factor in improving sentiment for European equities, with incoming President Christine Lagarde keen to support this direction. Last week, Lagarde went on record to suggest that Germany and the Netherlands should begin to splash some cash on areas such as infrastructure.

Brexit Update: The United Kingdom Heads Back to the Polls

Last week, the European Union confirmed its Brexit extension until January 31 and the UK parliament subsequently approved a general election for December 12. As a result, the hyped-up Halloween Brexit deadline slipped past in a decidedly anti-climactic fashion.

Political posturing for the general election has already started, and at this early stage the polls and analysts are predicting a Conservative victory.

Markets generally reacted positively to the Brexit extension as it removed short-term risk of a no-deal exit. The announcement of the election also helped as it is seen as the best route towards a deal and gives a chance for the United Kingdom to tidy up the political mess it is in.

We did see some resilience in the UK economy last week as the PMI reading improved (faring far better than the German reading for comparison) despite the headwinds that remain.

Last Week

Europe

European equity markets pushed higher last week, with better sentiment globally thanks to dovish central banks, positives noises on US/China trade and the avoidance (or postponement) of a hard Brexit.

Italian equities outperformed amid news of a potential auto manufacturing merger. French and German equities also closed the week higher, while Spanish equities were down.

Earnings drove European sector performance, as industrials and health care names closed higher, while banks and telecommunications companies ended the week in the red.

There wasn’t much European macro data of note last week. Eurozone quarter-on-quarter GDP growth came in ahead of estimates, while French and Spanish GDP were in line with expectations.

Asia   

Asian markets were mostly higher for the week. Clearly, hope of a trade deal between the United States and China helped underpin markets. This positive trade narrative helped Hong Kong equities trade up for the week despite some awful macro data. Hong Kong entered recession after another quarter of negative GDP growth. In addition, Hong Kong retail sales and visitor numbers were also weak, as the impact of the protests continues.

In China, market focus centred on weaker manufacturing PMI data, which remains in contraction territory.

South Korean stocks closed in positive territory, getting a boost from strong profits from an electronics heavyweight.

Australian equities underperformed as mixed earnings saw heavyweight financial stocks decline.

Week Ahead

Politics

• UK election campaigns begin in earnest ahead of the December 12 UK general election, with plenty of noise expected.

Monetary Policy

• The Bank of England’s Monetary Policy Committee meets on Thursday (Nov 7). The central bank is expected to keep interest rates on hold. Any commentary around Brexit will be of interest, but given the lack of clarity we wouldn’t expect much new.
• The European Commission is due to publish its economic forecasts on Thursday (Nov 7) and the ECB will publish its economic bulletin. In addition, euro-area finance ministers will pick a new ECB board member.
• There are plenty of Fed speakers throughout the week; it will be interesting to see if they are in line with Powell’s post interest-rate cut sentiment.
• We expect a Reserve Bank of Australia (RBA) interest rate decision on Tuesday (Nov 5).

Economic Data

• Europe: Euro area manufacturing PMI UK Services & Composite PMI (Tuesday); Euro area Retail Sales, Euro area Services and Composite PMIs, German factory orders (Wednesday); German Industrial Production, Italian Retail Sales (Thursday), German Trade Balance, French Industrial Production & Trade Balance (Friday).
• US: New Factory Orders (Monday); Trade Balance, Composite PMIs, ISM Non-manufacturing (Tuesday); Initial Jobless Claims (Thursday), University of Michigan Consumer Sentiment, Wholesale inventories and Trade (Friday).
• APAC: China Caixan Manufacturing & Composite PMI (Tuesday), China Trade Balance & Japan Leading Index (Friday).

Views You Can Use

Insight from Our Investment Professionals

Malaysia’s 2020 Budget: A Delicate Balancing Act

Malaysia’s newly unveiled 2020 budget displays a commitment to sustainable long-term growth, according to Sukumar Rajah and Hanifah Hashim. Here, they suggest how the country’s foreign investment, transport and employment initiatives could drive the domestic economy. Read More.

The Role of Active ETFs

Exchange-traded funds (ETFs) are no longer the preserve of investors who are solely focused on passive vehicles. Recent years have seen ETFs evolve in sophisticated ways to address developing investor needs. In this article, Jason Xavier, Head of EMEA ETF Capital Markets, examines “active” ETFs, and answers some common questions about them that he hears from investors. Read More.

Templeton Global Macro: An Update on our ESG Scores

Templeton Global Macro evaluates environmental, social and governance (ESG) factors in its macroeconomic research process and describes the process of codifying the team’s research discussions into quantifiable scores. Read More.

Three Tenets for Investing in Innovation

With global economic growth experiencing a slowdown this year, some investors may be concerned about valuations for the innovative companies that have been popular during the past decade. Against this backdrop, Franklin Equity Group’s Matt Moberg explains why he thinks select companies have the potential to grow faster than the overall market in the next decade and beyond. He also shares his team’s three guiding principles for investing in these companies. 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 Templeton’s European Trading Desk as of  4 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.

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 site’s 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.
__________________