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The CAC 40 index tumbled by over 2% on Monday as investors reacted to the new snap election in France. It crashed to a low of €7,850, its lowest level since February this year. It has tumbled by more than 5% from its highest level this year.

European election fears

The CAC 40 index has joined the euro and other European indices in a strong sell-off. In Germany, the DAX index crashed by over 67 basis points while in Italy, the FTSE MIB index fell by over 1%. French bond yields jumped sharply as investors braced for more volatility.

In France, the main catalyst for the fall was the weekend election in which right-wing parties won a large number of votes. As a result, Emmanuel Macron announced a snap election in a bid to confront Marine Le Pen.

Most companies in the CAC index were in the red. Societe Generale’s stock plunged by over 6.34%, making it the worst-performing company in the index. It has risen by just 1.44% this year. 

Credit Agricole and BNP Paribas stocks also tumbled by over 4%. In addition to the political situation, the stocks dropped as investors reacted to last week’s decision by the European Central Bank (ECB) to start cutting interest rates by 25 basis points. 

Vinci, a leading infrastructure company, was the second-worst-performing company in the CAC 40 index as it plunged by over 5%. The other top laggards in the index were companies like Engie, Bouygues, Veolia, and Thales, which tumbled by over 3%. 

Even the index’s best performers this year like Renault, Safran, Schneider Electric, and Publicis were deeply in the red on Monday.

Still, this drop seems like an overreaction as we saw when Donald Trump was elected the President of the United States in 2016. While stocks crashed initially, they then surged sharply in his term. 

For one, in most cases, data shows that stocks do well regardless of the president. For example, US equities have soared to a record high in Biden’s presidency. When he came in, the view was that he would be bad for business by hiking taxes and increasing regulations.

Most importantly, there are signs that French stocks will benefit from central bank rate cuts. The ECB slashed interest rates by 0.25% last week and hinted that more are coming. Analysts at Citigroup expect that the Fed will start slashing rates in September while those at Standard Chartered see it cutting in July. 

Further, French companies are doing well, helped by Europe’s and China’s recovery. Airbus has gained market share against Boeing while French banks are doing well and boosting dividends and buybacks.

CAC 40 index forecast

(Click on image to enlarge)

CAC chart by TradingView

Turning to the daily chart, we see that the CAC 40 index crashed after it formed a double-top pattern at €8,262. In most cases, this is one of the most popular bearish signs in the market.

The index has now moved below the neckline at €7,900, its lowest swing in May. Also, the 50-day and 25-day Exponential Moving Averages (EMA) have formed a bearish crossover. It has also crashed below the first support of the Woodie pivot point. 

Also, the MACD and the Relative Strength Index (RSI) have all pointed downwards. Therefore, the index will likely show some more volatility in the coming weeks and then start rebounding as the election fears fade. 

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