Market Analysis

CAC 40: Potential bearish exhaustion as Italian concerns continue to weigh on sentiment

Yesterday, the European Central Bank (ECB) kept the interest rate unchanged at 0%, as widely expected by market analysts, saying it will end asset purchases in December 2018 and that the interest rates can be expected to remain at record low levels at least through the summer of 2019. Meaning the borrowing cost will remain low to stimulate consumption, which in turn will stimulate the economy. The ECB president Mario Draghi at its monetary policy statement and press conference assumed that there had not been much discussion about Italy budget as he is confident an agreement can be found.

According to analysts, the French 2019 budget indicates that the government relies heavily on very optimistic revenues to achieve fiscal consolidation and that the spending appears to be out of control again. However, in the case of France, the tone of the warning from Brussels to Paris was softer than the tone towards Rome, although the two countries have perhaps more similarities than differences.

Fundamental releases this week affecting the CAC 40: The preliminary French Manufacturing Purchasing Manager’s Index (PMI) fell to 51.2 in October, comparing to the previous reading of 52.5 and missing analysts’ estimates of 52.4. On the other hand, the preliminary French Services Purchasing Managers’ Index (PMI) increased to 55.6 comparing to the previous data of 54.8 and came out above analysts forecast of 54.7. A reading above 50 indicates expansion in the sector on both indicators.

Since the beginning of 2018 until last Thursday close, the French index remains negative with a loss of over 5.5% but since the start of October, the CAC 40 dropped more than 8.5%. Nonetheless, the week began on the left foot with a decline in excess of 1.8% and on the daily basis closed green with over 2.0% gain furthermore, it is in a bearish phase since mid-October.

On yesterday session, the French index began an upward rally straight out of the opening bell and managed to close near the high of the day, however, it did not have the strength to close above the Wednesday high, which suggests being slightly on the bullish side of neutral.

The stochastic is showing an oversold market and is beginning to display a shy bullish momentum.

October has been a dark month for the stock markets in general and for the French index, it has been the worst month since the beginning of 2018. CAC 40 erased all of its initial gains in a single month and even managed to make a new year-to-date low at 4,899.5. However, the last three days suggests a potential bearish exhaustion that can either lead to a correction by time (consolidation) or even by price (upward move). Are there signs of a bearish exhaustion? Possibly. On Tuesday,  a downward gap followed by a strong bearish candle signaled a bearish continuation, however, the price action yesterday revealed a different market sentiment as it pushed the price back up completely bouncing from a daily support and rejecting the bearish momentum.

Watch out today: At 07:45 GMT (03:00 PM ET) will be released the French consumer confidence for October, which is expected to remain unchanged at 94. Consumer confidence it is a leading indicator as it can predict consumer spending, which plays a major role in overall economic activity and higher readings point to higher consumer optimism. The ECB President Draghi’s is scheduled to speak at 15:00 GMT (11:00 AM ET) as investors will be looking for comments on the current development of European economy and the situation of Italian budget especially the government’s spending plans.

Fra40 is a CFD written over CAC 40 futures.


CAC 40: Potential bearish exhaustion as Italian concerns continue to weigh on sentiment

Fra40 Nov ’18 Daily Candlestick Chart


Written by Hugo O’Neill, External Analyst


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