The CAC 40 index soared this week, thanks to ongoing stimulus measures by the Chinese government and actions by the Federal Reserve and the European Central Bank (ECB). It soared to a high of €7,740, its highest point since June 13. It has risen by over 10% from its lowest point in August.
Chinese stimulus hopes
The CAC 40 index is a leading instrument that tracks the biggest companies in France. Like other global indices, the main catalyst was the decision by the Chinese central bank and the government to implement a series of stimulus measures.
The central bank slashed interest rates again and implemented measures to lower bank reserves. As a result, the bank hopes these actions will help stimulate lending to individuals and companies.
At the same time, Chinese officials announced major measures, which are expected to unleash over $140 billion.
These actions came at a time when the Chinese economy was slowing. The most recent economic numbers showed that the economy rose by 4.7% in the second quarter, missing the analyst estimates.
Other numbers have shown that the country’s retail sales, industrial production, and manufacturing sectors continued contracting in August.
China’s actions are important for both local and international companies because of its size as the second-biggest economy in the world.
It is also crucial for the CAC 40 index because many constituent companies do a lot of business in the country. Luxury brands like Louis Vuitton, Hermes, and Kering are the most notable ones.
LVMH stock jumped by over 14% this week, while Kering, the parent company of Gucci, jumped by 11%. Hermes, commonly seen as the best luxury company in the world, rose by 15%.
These stocks, especially Kering, have come under pressure in the past few months as concerns about China’s slowdown continued.
Other companies with substantial Chinese exposure, like L’Oreal, Pernod Ricard, ArcelorMittal, and Stellantis, jumped by over 5%.
Central banks easing
The CAC 40 index continued rising because of the recent actions by global central banks, which have started to unwind their post-pandemic hikes.
In Europe, the European Central Bank (ECB) has delivered two interest rate cuts this year and there are signs that the trend will continue. Data released this week by S&P Global showed that the manufacturing and services sector contracted in September.
The Federal Reserve also delivered a jumbo rate cut last week. It slashed rates by 0.50%, a bigger number than most analysts expected. At the same time, officials who talked this week pointed to more cuts in the last two meetings of the year.
Other central banks from countries like Switzerland and Sweden also slashed interest rates this week.
Stocks often do well when rates are falling for two main reasons. First, in most periods, money in fixed-income assets like bonds often rotates back to equities. Recent data showed that over $6.1 trillion was tied to money market funds.
Second, corporate activity tends to jump when rates fall. Data shows that deals worth over $1.6 trillion have been announced this year, a trend that will continue if rates continue falling. Analysts believe that some French companies could become acquisition targets because of their cheap valuations.
A potential deal that is being watched closely is between Unicredit and Commerzbank, the second-biggest bank in Germany. Unicredit has bought shares and its CEO has hinted that an acquisition is a possibility. Analysts expect some French banks to become targets as interest rates continue falling.
A key risk for the CAC 40 index is that the euro has become quite strong, rising to 1.1160, its highest level in months. A stronger euro affects some of the biggest French exports.
CAC 40 index analysis
The daily chart shows that the CAC 40 index has staged a strong comeback in the past few weeks.
It has moved back to the neckline of the inverse head and shoulders chart pattern. Also, the index has risen above the 38.2% Fibonacci Retracement point.
It has also jumped above the 50-day and 200-day Exponential Moving Averages (EMA), pointing to more upside.
Oscillators like the Relative Strength Index (RSI) and the MACD have also pointed upwards. Therefore, the CAC 40 index will likely continue rising as bulls target the next key resistance point at €7,910, the 23.6% retracement point.
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