Political Uncertainty Used as a Pretext to Sell the CAC 40
As we indicated yesterday, the CAC 40 was heading for a temporary relief... before a reversal from its key resistance at 7,750. The daily performance ended at -0.63%, despite the index being firmly in the green in the morning. Traders should not be surprised: this type of behavior is typical of a summer Monday, characterized by lower volume, higher volatility, and maybe even some manipulation.
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Yesterday, luxury stocks weighed heavily on the French index in the second half of the session, in particular LVMH (-2.9%) and Kering (-2.8%). The CAC 40 is expected to move towards the target of institutional traders betting on the downtrend, located at 7,350, which coincides with a major support where a rebound should be expected. Selling pressure on the French index has been strong since institutional investors took profits at 8,270. Still concerning, the CAC 40 continues its free fall relative to the S&P 500, underperforming it since March 13, 2023. Political uncertainty proves to be a pretext for selling. Shortly after today's opening, the CAC 40 is down 0.60%.
Institutional traders' profit targets (red box) confluent with the upper macro resistance trendline rejected CAC 40 prices to the downside before the political uncertainty occured in France. Source: xStation.
A Resilient Bond Market
On the bond market side, the French 10-year bond yield is declining. Markets seem to welcome the legislative results. Currently at 3.184%, the rate is expected to drop to 3.119%. A break below 3.050% would confirm the market's digestion of the national dissolution event and its consequences. There is nothing to report on France's Credit Default Swap (CDS) either, currently steady at $31.45.
Investors have been reassured by the exclusion of the possibility of a majority for the Rassemblement National (RN), La France Insoumise (LFI), or Nouveau Front Populaire (NFP), in favor of a centrist coalition. However, the situation remains uncertain. The NFP could propose a LFI Prime Minister. A centrist coalition could adopt left-leaning policies, including abrogating the pension reform or increasing taxes without reducing public spending.
Markets are overlooking France's pre-existing financial fragility, already downgraded by S&P and under an excessive deficit procedure. Deficit reduction measures are imperative to avoid further downgrades and reluctance from the ECB to intervene. Prolonged political uncertainty risks further weakening the French economy, hindering private and foreign investment.
Chart of the Day: CAC 40 Heading Towards 7,350
Our preferred scenario for the CAC 40 is highlighted in black (yesterday it was in red). Political uncertainty serves as a pretext for selling the CAC 40. Source: xStation.
By Antoine Andreani, Head of Research at XTB France
