CAC Continues Rally as Government Falls, Rate Cut Bets Increase
French stock investor sentiment turns bullish after Barnier’s government is toppled in vote of no confidence.
- Government loses vote of no confidence
- Rate cut bets increase
- PMI data beat expectations
The CAC rallied another 0.85% this morning after the Barnier government lost a vote of no confidence yesterday evening. If today’s run holds, it would make 6 successive closes in the green.
Political Uncertainty
As the market widely expected yesterday’s vote of no confidence led to the government being deposed. The next election cannot be held until next July, leaving more than 6 months of caretaker governing.
The risk of low to no legislation is high and attempts to reign in the government debt look slim. What has been accomplished, with the recent budget being forced through parliament without a vote has been positively.
French stocks are looking cheap compared to its peers in Germany. While the DAX is up 20.97% YTD, the CAC is down 2.83% YTD. But as an investor you might take caution as buying stocks given the political scenario.
Last week S&P maintained its AA- rating, but the impossibility of legislation and a new pro government-spending cabinet could see a downrating. In which case buying French stocks right now could seem an imprudent move.
CAC Live Chart
ECB Rate Cuts
The market is increasing its bets on further cuts from the ECB in the coming months. A cut of 0.25% is well priced in, with some analysts expecting a possible cut of 0.50% at the next meeting.
Economists are also expecting further cuts going into 2025. Many comments from various ECB members and Eurozone central bankers have given such indications.
The Eurozone’s largest economy, Germany, is technically in a mild recession and its main peers such as France and Italy are only doing slightly better.
Inflation is falling inline and inflation expectations also within the central bank target of 2%. What remains to be seen is whether the CAC can shake off political uncertainty and join the monetary easing rally.
PMI Data Shows Improvement
Yesrtedard Services PMI fell less than expected at 46.9, when most forecast were for a number at 45.7.
And today’s Construction PMI rose to 43.7 from last month’s 42.2 compared to analysts’ forecasts of 43.
These numbers for PMI data may indicate a bottom in the contraction of economic activity. The CAC will certainly benefit from stronger data even if it fails to show expansion, just as long as the contraction is decreasing.
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