Is France’s Stock Market Cracking?

Breaking From the Wedge

France is currently Europe's “sick man”, not least due to the destructive economic policies pursued by its socialist government. Halfhearted attempts at reform have so far not achieved any notable change, precisely because they are going nowhere near far enough. President Hollande seems to be waiting for the recovery in the rest of Europe to bail him out. His willingness to look beyond leftist dogma and display political courage seems rather limited, which we have always attributed to his fear of being challenged from elements even further to the left, both in his own party and outside of it. However, it is probably more than that: he is a true believer, and is suffering from the delusion that governments can suspend economic laws by fiat. This delusion is of course shared by central planners all across the so-called capitalist world, but it is especially pronounced in his case.

A friend just pointed out to us that France's stock market suddenly looks rather wobbly. French stocks rallied strongly along with other European stock markets once fears over the sovereign debt crisis receded. As we have discussed previously in these pages, year-on-year true money supply growth in the euro area surged strongly from its late 2011 low near 1%, to a high slightly above 8% in early 2013, and has since then begun to decline noticeably again (see our assessment of Europe's tepid economic recovery from mid May: Europe’s Recovery is Stuck in the Mud. A chart of the euro area's true money supply and its annualized growth rate can be seen here). The money supply growth rate is still fairly high at present, but the trend is down and one cannot tell in advance what level will be the threshold that triggers the next bust. However, it would certainly make sense if France's stock market were to lead other European markets at the turning point.

There is a chance that such a turning point may have arrived. Of course, this isn't the first time European stocks are correcting since their uptrend started, and one can never be certain whether short term moves really have significance for the larger degree trend. France's stock market is acting worse in the recent correction than other European markets, but we thank that may well be because it is  leading them.

The character of the recent correction seems different from that of previous short term downturns, even though its extent is not yet unusual. Contrary to previous dips, the market has put in a second lower high on the daily chart. The move has moreover clearly violated the lower boundary of the preceding wedge-like advance. The last rebound attempt didn't even manage to move the CAC-40 index back to the broken trend line for a “good-bye kiss”, which we believe is a strong sign that something is amiss.

The CAC-40 breaks down from a wedge-like advance – click to enlarge.

It is also noteworthy that the CAC-40 actually made its all time high back in early 2000 – over 14 years ago. As can be seen on a long term monthly chart, the pattern since the peak is eerily reminiscent of the Nikkei's pattern after its 1989 top:

A long term chart of the CAC-40 (monthly candles). The market's behavior since its peak in 2000 is reminiscent of the post-bubble Nikkei – click to enlarge.

Of course, so far the recent decline is only a baby bear attack (h/t BC) and barely visible on the long term chart.

Baby bear attack

The Fundamental Backdrop

Below are several charts illustrating France's economic and public debt situation. Clearly, things have begun to move in the wrong direction again. It is also noteworthy that interest rates on government bonds have just dropped to an all time low. With worries over the likelihood of sovereign default off the table for now, other considerations are driving interest rates in the major European government bond markets. Evidently the markets are not convinced of the widely touted recovery story. The recent moves in government bond yields are also strongly reminiscent of Japan's post bubble era.

France's 10 year government bond yield has just dropped to an all time low – click to enlarge.

France's public debt-to-GDP ratio has meanwhile risen to above 90%, more than 50% above the EU's “fiscal pact” limit:

France's public debt-to-GDP ratio keeps climbing - click to enlarge – click to enlarge.

The annual spending of France's government amounts to an astonishing 57.1% of GDP. In many respects it seems that France is moving closer and closer to becoming command economy (we have discussed the “Zwangswirtschaft” aspects of France's economy under Mr. Hollande's government previously). Incidentally, French government spending has soared again in late 2013.

France's government spending as a percentage of GDP is at a record high – click to enlarge.

The unemployment rate meanwhile remains stubbornly stuck above 10%, industrial production is declining sharply again, and business confidence has been waning since March.

France's “sticky” unemployment rate - click to enlarge.

French industrial production – nothing to write home about - click to enlarge.

Economic confidence is once again on the wane - click to enlarge.

 

Conclusion:

Something may be brewing in “risk asset” markets and France's stock market could be sending a warning signal. Keep also in mind that technical divergences, as well as astonishing extremes in bullish sentiment, positioning and leverage continue to be in evidence in many stock markets. Although money supply growth remains fairly brisk in the major currency areas, it is no longer as strong as it once used to be, and bubbles can ultimately only be sustained if it remains very strong or even accelerates. The possibility that a bigger financial accident is on its way can certainly not be ruled out.

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