by European Desk, Ediburgh, Scotland, Franklin Templeton Investments
The Digest
US markets were higher last week, with dovish meeting minutes from the Federal Reserve (Fed) and a decent start to earnings season boosting sentiment. [backc url='http://www.dynamic.ca/leadership/eng/active.html?fund=dreii2f&utm_source=aa&utm_medium=banner&utm_campaign=alts_2019&utm_content=dreii2f']
European equities were slightly weak overall, but equities in both regions saw bullish cyclical rotation as the year’s underperformers caught a bid. Asian equities were mixed amid what appeared to be profit-taking in Chinese domestic shares.
Last Week
Europe
European equities were relatively unchanged last week with little in the way of key drivers either way. The emergency EU summit in Brussels was in focus whilst the ECB release also garnered some interest.
Cyclical rotation drove sector moves and regional indexes were mixed with equities in France and Italy stronger on better data, whilst German equities were worse off on data and the UK’s FTSE Index was likewise weaker amid a stronger pound.
There were negative headlines out of Italy after the country lowered its economic growth forecasts for 2019 to 0.2% from 1%.
This means the government’s budget deficit for the year would sit at 2.4%, vs. the 2.04% deficit set in December after a long-running battle with the European Commission (EC).
Economic growth for 2020 was also revised lower. This will likely rekindle tensions between the EC and Italy and is something to keep an eye on.
In terms of data, French, Italian and UK industrial production all beat expectations in February. The overall eurozone industrial production in that month also beat, down 0.3% on the year vs. a dip of 0.9% expected. German exports missed estimated in February, down 1.3% vs. an estimated dip of 0.5%.
Brexit Watch
Focus last week was on Wednesday’s European Union (EU) leaders’ summit in Brussels. The conference resulted in the EU27 granting the United Kingdom a Brexit extension until October 31. (We’ll save the Halloween puns for nearer the time.)
There was flexibility attached; meaning, should the UK agree a deal before that date then it can leave the EU earlier. However, if an agreement is not made by May 22 then the UK will be expected to participate in the EU parliamentary elections May 23-26.
If the UK does not hold European elections, then the country will leave the EU automatically on June 1. The outcome was market-friendly as it took the immediate risk of a no-deal Brexit off the table, driving some relative sterling strength last week on Thursday.
The extension means the UK parliament has more time to come to an agreement on the country’s future outside of the EU. The latest indicative votes had suggested there was movement towards remaining within a customs union with the EU.
UK Prime Minister Theresa May and Labour Party Leader Jeremy Corbyn are reported to be closer to finding some consensus as it’s thought that May has softened her stance. However, all options remain a possibility.
The events of last week heighten the uncertainty over the longevity of Theresa May’s reign as leader of the Conservatives.
We are still unsure whether May will remain in position until the end of the new negotiating period. Should the government continue to fail in their quest to secure a deal then it will inevitably result in questions over who is best to lead the country forward as Conservative Party leader. A more ardent Brexiteer, such as Boris Johnson, would represent a risk to markets in our view. There is also the risk of a general election.
The UK parliament is now in recess until April 23.
Interestingly, we did see a rebound in some UK macro data last week. The UK economy grew 0.2% (month-over-month) in February, more than the flat reading expected. The pickup was broad based, but Brexit related stockpiling may have helped drive the positive surprise. According to some sources, some companies may have brought forward orders before the original March 29 deadline for leaving the EU. We did see evidence of investor interest returning to UK equities last week.
Overall though, UK growth remains sluggish and as negotiations are drawn out further, we are unlikely to see a convincing rebound in data any time soon as uncertainty continues.
Americas
US equities were higher last week overall and the focus was again on central bank commentary with the March FOMC meeting minutes released on Wednesday. There was also some rhetoric around US trade talks with China and the EU.
The FOMC minutes continued the recent dovish theme with the majority of members preferring to keep rates on hold for the rest of 2019.
The minutes noted that the “appropriate response of the federal funds rate to signs of labour market tightening could be modest provided that signs of inflation pressures continue to be limited.” It is these inflationary pressures which have been a key factor in how participants review current policy.
Also in the release, there were notes given on balance sheet normalisation, but little that hadn’t already been communicated before.
On trade talks, we came in on Monday to reports of progress between the United States and China. US Economic Advisor Larry Kudlow stated that the two sides were getting “closer and closer” to a trade deal following talks the previous week. Chinese President Xi had also appealed to his negotiating team for substantive progress as soon as possible.
Signs of US-China progress have clearly provided support to equity markets in recent weeks; however, just as tensions with China appear to be easing, the US has turned its attention to Europe.
On Tuesday of last week we saw reports that the US Trade Representative was proposing tariffs on €11bn worth of goods and services in retaliation for EU subsidies. The list of goods which the tariffs could apply to includes food and drink, clothing, motorcycles and aircraft parts.
Meanwhile, the EU and China released a joint communique on trade where they stated they will “work together for peace, prosperity and sustainable development and their commitment to multilateralism”. The tone was one which suggested they would work together to fight the impact of US trade policies.
Asia
Asian equities were mixed, with gains in markets in Japan and Australia offsetting a decline in the Shanghai Composite Index in China.
There was actually a decent pick up in Chinese macro data, with month-on-month inflation data improving and a better-than-expected trade surplus thanks to a jump in March exports.
Positive commentary on trade talks failed to stem the domestic market weakness, but we would note the Shanghai Index was up 5% the prior week and approximately 30% year-to-date. With this, it seems clear to us that some profit taking might be occurring.
Japanese equities made small gains, although macro data from the region remains soft. The March consumer confidence reading was below estimates and preliminary machine tool orders for the month fell a shocking 28.5% year-on-year.
Australian equities were strong last week. Strength in the miners drove the market amid trade hopes as well the current prime minister’s announcement calling a general election on May 18.
Week Ahead
Investor focus will likely shift to first-quarter earnings season, which continues in both the United States and Europe. It’s a holiday shortened week for developed Europe, with most markets closed on Friday and Monday for the Easter holiday.
Politics
- UK parliament is in recess until April 23, but further cross-party talks are expected to be held and so we can expect further headlines.
- Two-day trade talks between the United States and Japan will commence Monday April 15. Last week Japan finalized the topics it aims to discuss, which included a trade agreement on goods, as well as some services, but officials plan to rebuff any request for automobile quotas or foreign exchange provisions.
Monetary Policy
- We hear from several central bank speakers throughout this week, with a Fed speaker expected every day apart from Friday. We also hear from Bank of England Governor Mark Carney on Wednesday, with focus likely to be on any commentary around the impact of Brexit.
Economic Data
- European flash purchasing manager reports (PMIs) will be the main macro event as they will give the first indication of how the economy has started the second quarter. We also get February trade balance data from the region on Wednesday.
- UK labour market data and inflation data are due out on Tuesday.
- US retail sales on Thursday are likely to show the beginning of an uptick following the recent dovish Fed rhetoric.
- We expect trade balance data, manufacturing PMI and inflation data from Japan this week, which will be important given last week’s disappointing releases.
- From China, industrial production, retail sales and first-quarter gross domestic product data are due out on Wednesday. It will be interesting to see if the recent improvement continues here.
Views You Can Use
Insight from Our Investment Professionals
Opportunities in the Next “Emerging” Emerging Market
Emerging markets offer a broad opportunity set for investors. However, many investors focus on the high-profile stories in Asia and Latin America, overlooking potential opportunities in other regions, as Franklin Templeton Emerging Markets Equity’s David Haglund explains. He notes how Africa is often an overlooked part of the emerging-market story, and why recent investments from China reflect the growth potential for countries such as Kenya and Nigeria in particular. Read More.
Bulls Return to Emerging Markets in the First Quarter 2019
After a challenging 2018, investors embraced emerging markets again in the first quarter of 2019 amid supportive fundamentals, including a more dovish US Federal Reserve. Franklin Templeton’s Emerging Markets Equity team outlines what drove market moves during the quarter and month of March, and why Asia remains an area of interest in particular. Read More.
Still No Roadmap to a Brexit Resolution as EU Offers Another Extension
Brexit may have been delayed again. The European Union has offered to allow the United Kingdom more time to decide how it wants to leave. While the measure may prevent a no-deal Brexit in the short-term, our Head of European Fixed Income David Zahn thinks it may simply be saving up problems for the future. Read More.
A Long Brexit Delay Now Seems Likely, but to What End?
Brexit negotiations are once again going to the wire. With no resolution in place and the clock ticking down, Sandy Nairn, chairman of Templeton Global Equity Group and CEO of Edinburgh Partners, looks at the possible outcomes. He explains why he thinks a long Brexit extension could be the most sensible option, and why he feels the deadlock might only be broken by a fresh plebiscite. Read More.
In the face of slowing economic growth, the Chinese authorities appear ready to act. Franklin Templeton Emerging Markets Equity’s Sukumar Rajah and Jason Zhu explain how measures announced at the 13thNational People’s Congress are designed to shore up China’s growth prospects. 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 April 15, 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 (“FTI”) 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 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.
______________________________
1. Indices are unmanaged and one cannot directly invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future performance.
2.Indices are unmanaged and one cannot directly invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future performance.
Copyright © Franklin Templeton Investments
