The risk factors for 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, they hold important support points for the French index. This tight “support” zone, between 5,600 and 5,800 points, consisting of old slopes whose origins go back several years, continues to offer a bulwark against bearish attacks and surrounding market pessimism.
On the front of energy prices in Europe, the situation is slightly 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 published by the German energy regulator on Thursday showed that German consumption has fallen in recent days compared to the same average period between 2018 and 2021, for both households and businesses. Likely mix between mild weather, individual effort, slowdown in economic activity… but perhaps also speculation about the development of the geopolitical situation in the coming weeks?
We cannot say that the Cac 40 rebounds in October were favored by the rate environment, whether in Europe or in the US. The French 10-year yield recently rose above 3% for the first time since 2012, and the Bund yield, meanwhile, exceeded 2.50% for the first time since 2011 (the period of the Eurozone debt crisis). However, we note a stability in interest rate spreads between the core countries of the Eurozone, despite the tensions that have recently appeared in the Franco-German pair: the “spread” between the 10-year yields in France and Germany has widened even tightened in recent days to mid-September levels, about 55 basis points. Same situation between the 10-year interest rates in Germany and Italy, the spread is relatively stable, around 230/240 basis points (ie less than half of the levels reached during the debt crisis of 2011-2012).
Which is pretty good news because it saves the ECB from having to use its “anti-fragmentation” instrument while monetary normalization continues. The ECB and the Fed will undoubtedly raise interest rates sharply again at the next meeting (Thursday for the ECB and November for the Fed).
But a couple of phrases from Fed officials appear to add some nuance to the dovishness 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 understood that we need to take into account the lag between rate hikes and their impact in order not to affect the economy too strongly… 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 “ delay indicator “, adding that we must remain dependent on economic data, and she detailed several sectors that are already showing a slowdown, such as demand for real estate or retail sales, she also cited the labor market. This likely means that the Fed also saw the latest 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 stated that they were monitoring developments in the situation in the United Kingdom, a sign of the particular vigilance of the bond market, whose decline over several months is monumental.
The US 2-year interest rate has reached 4.6% in recent days, while it only moved at… 0.2% in September 2021! It has also reached the average 2023 rate projection for Fed members (via the famous dot plot), so it is an important psychological level.
Late last week, the Fed’s Mary Daly spoke again, saying that 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 monetary talks appear to be developing very little, the technical area of 5,600-5,800 points on the Cac 40 still appears to be an important area that may contain downward pressure. The French index currently pays 10 times earnings, post-Covid overvaluations have been corrected and the non-dividend index is trading below pre-Covid levels. If this technical zone did give way, this move would rather be seen as a “bear trap” that was not meant to last too long.
Play this strategy with: