French CAC 40 Boosted By Stronger “Bremain” Polling

After sinking to levels last seen in February late last week, the French CAC 40 is on the rebound, benefited in large part by improving risk sentiment after the latest “Brexit” vote data showed the “remain” camp gaining ground in polling. The sharp increase comes at a time of heightened volatility for risk assets with the referendum vote scheduled for later in the week. Although the backdrop on the monetary policy side is highly supportive of further upside in risk assets like shares, the domestic fiscal conditions prevailing across France continue to keep a lid on valuations. As the country struggles to overcome disagreements surrounding labor reform, the CAC 40 index will continue to reflect these vulnerabilities. Additionally, the rise of more nationalistic political parties might also derail progress as favorable attitudes towards the European Union decline, adding to an uncertain outlook.

Brexit Dependent

Although many pundits have talked about the impact on the UK economy a decision to leave the European Union would have, the ripple effects for Europe are equally relevant.For one, the rise of anti-austerity parties and nationalistic entities would be further emboldened by a “Brexit” result, in specific benefiting the National Front in France which continues to gain traction. According to research conducted by the PEW Research Center, the European public’s favorable attitude towards the EU continues to decline across many significant members of the bloc. Any sort of fears that resemble those surrounding the debt crisis that threatened contagion across the Euro Area could definitely have a negative impact on equity valuations as evidenced by the sensitivity of regional risk assets to the “Brexit” polling. However, outside of regional risk sentiment, are economic conditions in France which remain tenuous.

According to the most recent data, France has slipped further into a trade deficit during the last reading, rapidly approaching levels last seen in 2014.While exports rose and the monetary policy backdrop remains supportive of growth in the nation, fundamentals have not markedly improved.Unemployment remains challenging while protests and rioting surrounding the recent labor reform moves are likely to weaken second quarter GDP results.While monetary policy conditions could not be better for French corporations considering the bond buying program has helped reduce borrowing costs significantly, equity valuations have not risen as considerably as was expected.  Over the last 52-weeks, 77.50% of CAC 40 components have shown negative returns, led in part by financials as interest income crumbles.However, weak performance in telecom, pharmaceuticals, and commodity producers have also been a drag on index returns which stands at -9.85% over the last 52-weeks.

Technically Speaking

Looking at the most recent rally in the CAC 40, the one item remaining the path of further gains for the benchmark is the 50-day moving average. After bouncing off the level on Tuesday’s session and failing to overcome the level, the prevailing downside bias remains intact.Even if the equity index does manage to rise beyond the 50-day moving average, the 200-day moving average is also acting as resistance against sustained gains. While the relative strength index is not showing the CAC 40 as quite overbought, the stochastic oscillator %K line is rapidly approaching the 80.0 level which indicates price momentum at a potential turning point.Should the %K (blue line) cross over the %D line (red line), a bearish signal would be produced, indicating a potential entry point for establish bearish positions.

Outside of technical indicators, the key levels to watch are resistance at 4540 on the upside and support at 4100 on the downside.After completing a bearish head and shoulders pattern earlier in the month and breaking downwards, the CAC 40 is back on the rebound.However, should the index overcome the moving averages and resistance, it could be a sign that the current downtrend is reversing.A failure to rise above resistance that is followed by a dip below the key support level would indicate that the downward trend remains intact, with a retest of February lows to be anticipated.Any momentum below 3891 will likely see prices break to the lowest levels since 2014 and give way to further losses in the index as the bear market already underway endures.

Looking Ahead

As the British referendum vote results stream in, it is wise to expect added volatility in the CAC 40 index.While a positive outcome which is widely viewed by markets as a decision to remain a member of the European Union will likely boost risk assets beat up by the uncertainty, a leave decision could see the CAC 40 tumble.Any sense that Europeans have a choice about EU membership could readily pave the way for other member nations to exit, adding to market turmoil.While the ECB’s monetary policy measures continue to support further upside in risk assets, domestic problems like unemployment and labor reform will continue to dog efforts to improve France’s economic standing.With limited developments to push the index higher outside of a positive referendum outcome, the stage is set for the recent rally in French CAC 40 to reverse lower as the index encounters resistance.