Notes From the Trading Desk – Europe

by European Trading Desk, Franklin Templeton Investments

Markets were in a muted state for most of last week before being awoken on Friday morning by the rather sudden re-escalation in political tension between the United States and Iran. It was a holiday-shortened week with all major indices closed on Wednesday for New Year’s Day, and most in Europe closed or partially closed on Tuesday as well. In terms of moves, the S&P 500 Index and the Eurostoxx 600 ended down, whilst the MSCI Asia Pacific outperformed, up modestly.1

The Digest

United States/Iran

What appeared to be a rather positive start in 2020 for global equity markets upon their return to trading after the New Year’s Day holiday break was reversed early on Friday with the news that the United States had killed the head of Iran’s elite Quds Forces, General Qassim Soleimani, via an airstrike in Baghdad. There were immediate fears of a rather extreme re-escalation in political tensions between the United States and Iran, with Supreme Leader Ali Khamenei warning of “severe retaliation”. President Donald Trump’s order to strike also received criticism in Washington, with US House Speaker Nancy Pelosi saying the action was taken without consulting Congress.

Trump tried to justify the move by tweeting on Saturday that Soleimani was a “terrorist leader” who “was already attacking our embassy and preparing for additional hits in other locations”. Despite this, the New York Times reported that two US officials had noted any evidence that further attacks were planned by Soleimani was “razor thin”.

Soleimani has had a fractious relationship with the United States for a number of decades, more recently as an unlikely bedfellow in the fight against Daesh. Critically, on Sunday, Iranian officials stated that they had officially pulled out of their 2015 commitments with regards to restrictions on their development of nuclear weapons.

Market reaction to the developments with Iran was risk-off, but also one of trepidation on Friday. Equities in Europe and the United States lost all of Thursday’s gains, with the Eurostoxx 600 Index closing the day down 0.3% whilst the S&P 500 Index later closed down 0.7% on the day. However, so-called “safe havens” were well-bid, with gains seen in gold, the Japanese yen and US Treasuries.

The starkest move was seen in the oil space, with West Texas Intermediate (WTI) and Brent crude oil both rallying more than 4% on Friday morning. As we saw in 2019, oil prices are always volatile around these types of events, with investors trying to establish what any rise in geopolitical tension does for supply out of the Middle East. Whilst the market may have sufficient reserves at present, we did see a tightening through the fourth quarter, meaning any supply shock is likely to have a more pronounced impact on inventories.

We also must consider the broader impact of an extensive and sustained rally in oil prices upon global economic growth.

The International Monetary Fund (IMF) predicts global gross domestic product (GDP) growth to recover this year to 3.4% from 3.0% last year (assuming Brent prices around $58 per barrel).2 Therefore, should the rally in oil prices be prolonged by a continuous heightening of geopolitical tension in the Middle East then we can expect the IMF to re-think its expectations. Currently, Brent is trading around the $69 level.

Therefore, from a market perspective, the impact of a rise in geopolitical tension is far-reaching and is looking increasingly likely to be a key focus for markets through the first quarter, with such forecasts possibly subject to early revisions.

Chinese Stimulus

Asian equities were helped through the latter part of last week with the news that the People’s Bank of China (PBOC) had cut the Reserve Requirement Ratio (RRR) by 50 basis points.3 In our view, this move should be of benefit to the economy, as it reduces the rate to which banks will lend money to businesses in the country. The head of the PBOC’s Statistics and Analysis Department did note that China’s RRR remained high compared to other global leaders and left them sufficient room to lower further should it be required. The change was expected, but the news nonetheless buoyed equities, with the Shanghai Composite up as much as 1.5% in the early session on Thursday.

Spanish Government

It looks as if a new government is finally set to take office in Spain after acting leader Pedro Sanchez persuaded a Catalan separatist party, the ERC, to abstain from an important vote.

Despite a confidence vote over the weekend yielding no solution (Sanchez only received 166 of the 176 votes required, with 165 against and 18 abstentions), the follow-up vote on Tuesday—which is a binary “yes” or “no”—is likely to give Sanchez victory. It has been reported that in return for their abstention, Sanchez has promised to open up dialogue with Catalan parties regarding holding a citizens’ vote on secession.

Markets usually respond well to more certainty, but the increased probability of Catalan separation from Spain will undoubtedly spook investors. Also, the new government’s plan around corporate tax rates will likely be another concern to investors. Spain’s IBEX Index was down slightly on Friday, not helped by broader market moves.

Global Macro

We received some December economic data last week which garnered some investor attention. There was an improvement in the Chinese manufacturing Purchasing Managers’ Index (PMI) which came in at 50.2, slightly higher than what the market had been expecting. There was also a notable rise in new export orders to 50.3, vs. 48.8 expected.

Eurozone macro also improved, with manufacturing PMIs revised higher. German and French consumer price indices were better than expected too, showing stronger-than-expected inflation of +1.5% vs. +1.2% previously in Germany, and +1.6% vs. +1.2% previously in France.

UK macro data was soft, however, with both manufacturing and construction PMIs missing estimates. The report showed the UK manufacturing and construction PMIs lower than anticipated (coming in at 47.5 and 44.4, respectively) as Brexit uncertainty continued to bite through December.

Week Ahead


  • Clearly, any developments in regard to tensions between the United States and Iran will be in focus following Trump’s weekend reiteration of his threat of “major retaliation” against Iran if they “do anything”.
  • Tuesday looks to be a busy day on the European political front, as UK Parliament returns from recess and begins three days of debate on Prime Minister Boris Johnson’s Brexit deal. The bill is expected to pass through the House of Commons to the House of Lords on Thursday.
  • Also on Tuesday, the UK’s opposition Labour Party’s executive committee will meet and set a timeline for their leadership contest to find a successor to Jeremy Corbyn, whilst on the continent Italian Prime Minister Giuseppe Conte will meet his coalition partners to smooth tensions over reforming Italy’s byzantine judicial system.


The key release this week will likely be US monthly employment report on Friday, but we also get the following, with investors looking for an improvement in euro-area macro (releases in focus highlighted):

  • US: Final PMI (Mon); Non-mfg. ISM, factory orders, trade, durable & cap goods (Tue); ADP employment (Wed).
  • Europe: Euro area & UK final PMIs (Mon); Euro area retail sales & CPI, Italy CPI (Tue); German factory orders, euro area & France consumer confidence (Wed); German industrial production & exports (Thurs); France, Italy & UK industrial production, UK GDP & trade (Fri).
  • Asia: Japan & China Caixin PMI (Mon); China foreign reserves (Tue); Japan cons. confidence (Wed); China PPI & CPI (Thur); China aggregate financing, new loans & M2 money supply (10-15 Jan).

Monetary Policy

  • We hear from a number of US Federal Reserve speakers throughout the week, but it is fairly quiet on the central bank front outside of that.

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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.

2. Source: IMF World Economic Outlook database, October 2019. There is no assurance that any estimate, forecast or projection will be realised.

3. A basis point is a unit of measurement. One basis point is equal to 0.01%.

This post was first published at the official blog of Franklin Templeton Investments.

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