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Notes from the Trading Desk – Europe

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.

The Digest

Global equities were higher last week, with each major region trading in the green. Europe’s STOXX 600 Index outperformed, closing the week up 1.8%, while the S&P 500 Index closed the week up 0.9% and the MSCI Asia Pacific Index closed up 1.4%.1 The focus for investors remains on the latest round of corporate earnings, which continue to show upgrades to estimates. Macroeconomic releases were mixed through the week, but still showed strength.

Last week, the Bank of England (BoE) announced signs of a path to tapering. Also, the US monthly employment report was closely watched as usual, with July nonfarm payrolls coming in at 943,000, beating expectations. Interestingly, there was a risk-off theme to global fund flows last week with the greatest amount going into cash, while gold flows were also notable.

COVID-19 Concerns on the Rise Again

It had seemed like COVID-19 trends in Europe were showing signs of progress, but last week brought further concerns about infection rates in the United States and Asia. Cases are trending higher in the United States as the country fights the Delta variant. Meanwhile, countries across Asia continue to see sharp rises in cases, causing renewed shutdowns.

On Friday 6 August, the United States recorded over 100,000 COVID-19 cases for the first time since February 2021. Even more worryingly, hospital admissions increased 40% in the space of a week, bringing strain to the healthcare system in some hotspots. Hospitalisations and deaths are skewed largely to the unvaccinated as the Delta variant is spreading quickly. The state of Mississippi has been particularly hard-hit, and we saw reports of only eight free intensive care unit (ICU) beds in the entire state on Thursday of last week.

US government focus is on areas where vaccination rates are low. There has been a recent uptick in vaccines being administered, with states such as Tennessee seeing a 90% increase in jabs over the last two weeks. A number of US companies have announced they will be requiring employees to be vaccinated ahead of any return to the office.

COVID-19 cases are also on the rise across Asia. Concerns about a potential outbreak in China have resulted in a tightening of restrictions there. Reported cases in China remain relatively low; however, the Delta variant is active and has been detected in the major cities. The country has gone into testing overdrive as the Chinese government tries to contain the most recent spread and Hong Kong also began to tighten restrictions again. Many companies in the region have begun to rethink their return-to-office projections.

Meanwhile, commodity prices took a hit following the news of increased restrictions in China. West Texas Intermediate crude oil closed last week down 7.7%, whilst copper was down 3% and iron ore down 5.1%.

The picture does appear to be improving in Europe for now, with vaccination rates high in the United Kingdom and continuing at a good pace across the eurozone. The United Kingdom has vaccinated 75% of its adult population, outpacing Spain, France, Italy and Germany.2 There continues to be no real signs of excessive strain on healthcare systems across Europe; however, ICU bed usage has seen an uptick in the past week. In the United Kingdom, where the Delta variant was rampant a few weeks ago, infection rates are dropping and hospitalisations and deaths remain at relatively low levels.

Schools are due to return from summer holidays over the next few weeks so that will be the next test for managing the spreads among a predominantly unvaccinated group.

The big question is what this all means for the global economy. Some analysts see a continued economic resurgence as herd immunity is reached amid the rise in cases and vaccination rates, while others see the recent rise in the COVID-19 cases stalling growth.

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