The new analysis of Alexandre Baradez, market strategist for IG.
The evolution of equity indices and investor sentiment is based both on the performance of companies, on the macroeconomy… and on technical factors.
And the observation that can be made on this last point is that the Cac 40 has come back into contact with a major technical area, a support that had already been tested during the acute stress phase of the first quarter, a few days after the start of the invasion of Ukraine. This oblique support originates on the old highs of 2015 and 2017 and has been tested many times since then, in 2018, 2019 and 2021.
This former resistance has acted as a support zone since March and is currently at 5,850 points. And, just below, there are also two major technical levels, the first formed by the old highs of 2010 and 2011 (currently at 5,600 points) and the other formed initially on the lows of 2011 and 2012 and which goes slightly below the 5,700 points currently. The area between 5,600 and 5,800 points is therefore particularly dense from a technical point of view and constitutes an interesting repositioning point for medium and long-term investors, especially after a major correction whose origin is multiple: inflation and monetary normalization, geopolitical crisis and macroeconomic slowdown.
If this technical zone seems to constitute a real interest over time, in particular with a Cac 40 index which is currently “paying” more than 11 times the profits, the behavior in the coming weeks is much more uncertain. Consumer confidence in France has fallen to its lowest level since 2013, that in Germany is moving to levels of weakness not seen since the creation of this measure more than 20 years ago… Geopolitical uncertainty remains the biggest threat at this stage and obviously entails recessionary risks for the euro zone, especially if gas deliveries are interrupted by next winter. For the moment, the ECB and several European leaders are dismissing this risk, but their scenario does not include a total stoppage of Russian energy deliveries…
The latest statements this week from the French and Ukrainian presidents indicate that they are counting on progress that can be counted over a horizon of several months yet, but with the possibility of a solution by the end of the year.
The corporate earnings season which opens in July will be crucial for the trend: investors have already adjusted prices a lot in relation to macroeconomic uncertainties and the monetary normalization of central banks, but the vagueness is important in relation to the microeconomics. The objective obviously being to know how corporate results have evolved in a context of rising wages, rising commodity prices and persistent supply difficulties (China has largely “deconfined” but the disruptions induced logistics will take several more months to normalize).
A change to note all the same: the fall in the price of raw materials quite pronounced in June, affecting oil as well as industrial metals and even certain agricultural raw materials. This allowed rates to stabilize a little and triggered a rebound in equity markets in mid-June.
So far, investors have seen the “glass half full” of the commodity downturn, ie an easing effect on inflation rates and expectations. But be careful that they do not start to see the “glass half empty” where the fall in raw materials would be the translation of a strong global economic slowdown…
This vagueness could continue to keep the Cac 40 close to this large support zone described above. However, if we were to go below (i.e. below 5,600 points) this should not be the signal of a new wave of sustainable decline, but rather the exhaustion of the downtrend in place since the beginning of the year, therefore a temporary incursion, which would mark a form of capitulation, before rebounding. For those who work more in the direction of the trend, however, it seems more prudent to wait for a return to the 6,500/6,600 point zone to confirm a change in sentiment and bury the risk of a relapse.