The risk factors for the Cac 40 have been known for months: inflation and monetary normalization by central banks, war in Ukraine and global economic slowdown. But in this still heavy global context, the important supports hold for the French index. This dense “support” zone, between 5,600 and 5,800 points, made up of old obliques whose origin is several years behind, continues to offer a bulwark against bearish attacks and ambient market pessimism.
On the front of energy prices in Europe, the situation is a little better. If we take the “Dutch TTF” natural gas contract for November as a reference, its price has fallen from €340/MWh in August to less than €110/MWh in recent days. Figures released by the German energy regulator on Thursday showed German consumption down in recent days compared to the same average period between 2018 and 2021, for both households and businesses. Probable mix between mild weather, individual efforts, slowdown in economic activity… but perhaps also speculation on the evolution of the geopolitical situation in the coming weeks?
We cannot say that the rebounds of the Cac 40 in October were favored by the rate environment, whether in Europe or in the United States. The French 10-year rate recently made an incursion above 3% for the first time since 2012 and the yield of the Bund, meanwhile, exceeded 2.50% for the first time since 2011 (period of crisis of the debt in the euro zone). However, we note a stability in the rate spreads between the core countries of the euro zone, despite the tensions that have recently appeared in the Franco-German couple: the “spread” between the 10-year rates of France and Germany has widened even tightened in recent days to mid-September levels, around 55 basis points. Same situation between the 10-year rates of Germany and Italy, the spread is relatively stable, around 230/240 basis points (i.e. less than half of the levels reached during the debt crisis in 2011 -2012).
Which is rather good news because it saves the ECB from having to use its “anti-fragmentation” instrument as monetary normalization continues. ECB and Fed will no doubt raise rates again sharply at the next meeting (Thursday for the ECB and November for the Fed).
But a few sentences from Fed officials seem to provide some nuance to the harshness of the Fed’s monetary messages for months. A few days ago, Esther George declared: We have made very aggressive rate hikes and it takes time for that to trickle down to the economy. “. It is implied that we must take into account the lag between rate hikes and their impact so as not to impact the economy too heavily… Same story with her colleague at the Fed, Mary Daly, who indicates that the last (bad ) inflation report was not a surprise as it is a “ lagging indicator “, adding that we must remain dependent on economic data and she detailed several sectors which are already showing a slowdown such as real estate demand or retail sales, she also cited the labor market. Probably meaning that the Fed was also watching recent data in addition to inflation reports, a sign of possible Fed reactivity if it feels the economy is slowing too much or markets are getting too jittery.
Members of the Fed also declared that they were monitoring the evolution of the situation in the United Kingdom, a sign of the particular vigilance of the bond market, whose fall over several months is monumental.
The US 2-year rate has reached 4.6% in recent days, while it was only moving at… 0.2% in September 2021! It has also reached the average rate projection for 2023 of Fed members (via the famous dot-plot), so it is an important psychological level.
Late last week, the Fed’s Mary Daly spoke out again, saying the Federal Reserve should ” do everything to avoid excessive monetary policy tightening. And almost at the same time, Treasury Secretary Janet Yellen (former Fed Chair) indicated that she don’t think inflation is taking root in the US economy “.
In this context where the monetary speeches seem to evolve very slightly, the technical area of 5,600-5,800 points on the Cac 40 still seems to be an important area that can contain downward pressures. The French index is currently paying 10 times earnings, post-Covid excess valuations have been corrected and the non-dividend index is trading below its pre-Covid levels. If this technical zone nevertheless gave way, this movement would rather be perceived as a “bear trap” not intended to last too long.
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