Notes from the Trading Desk – EuropeApr 8, 2019

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what our 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.

notes from trading desk Europe

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?


May’s 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 we’ve 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 “Corbyn-risk” 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 this—helped by an uptick in real wages—the 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 China’s Vice Premier Liu He in Washington on Thursday. There had been some speculation that Trump might announce plans for a summit with China’s President Xi Jinping following the meeting.

G20 summit flags

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 Trump’s economic advisor Larry Kudlow after the meeting. Kudlow claimed “good headway” 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 “endgame stage”.

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


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.

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: “Manufacturing momentum will continue to be subdued in the coming months, particularly due to lacking external demand.”

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.


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.

Look Out For... (April 8-12):

Monday, April 8

  • German February Trade Balance Link

Tuesday, April 9

  • US February Job Openings and Labor Turnover Survey Link

Wednesday, April 10

  • European Central Bank Monetary Policy Statement Link
  • US March Consumer Price Index Link
  • UK February Gross Domestic Product Link
  • UK February Manufacturing Production Link
  • UK February Trade Balance Link

Thursday, April 11

  • US March Producer Price Index Link
  • China March PPI Link
  • China March CPI Link
  • German March CPI Link
  • French March CPI Link

Friday, April 12

  • Reserve Bank of Australia Financial Stability Review Link
  • US March Import and Export Price Indexes Link
  • Spanish March CPI Link
  • Eurozone February Industrial Production Link

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 “quantitative easing” which he said would turn the economy into a “rocket ship”.


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.

Wednesday’s 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 “tiering” 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.


  • 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)


  • 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.

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