Here’s why the CAC 40 index remarkable rally has faded
The CAC 40 index has lost momentum in the past few weeks as the rally experienced earlier this year faded. After peaking at €7,588 in May, the index has pulled back by more than 5% to €7,250. Most luxury group stocks that led this rally have pulled back as well.
China economic recoveryCopy link to section
The CAC 40 index jumped to a record high this year as demand luxury goods stocks like LVMH and Hermes jumped. These companies confirmed that they were doing well by publishing strong quarterly results numbers.
Most of this growth came from China, where these companies have invested massively in the past decade. Now, however, there are concerns that the Chinese economic recovery has stalled. As I wrote here, data published on Wednesday showed that the country’s exports and imports dipped in May. As a result, China’s trade surplus narrowed to the lowest level in months.
Other economic numbers from China have been a bit weak. For example, youth unemployment is still high while retail sales are growing at a slower pace than expected. As such, there are concerns about whether luxury goods demand will thrive in the second half of the year.
The CAC 40 index also pulled back as signs showed that the momentum seen earlier this year in the European economy has started to fade. Data published on Thursday revealed that the European economy contracted for the second straight quarter.
The European economy contracted by 0.1% in the first quarter. Its year-on-year gain of 1% was also lower than Q4’s 1.8%. These numbers are important because many CAC 40 constituents do a lot of business in Europe.
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The American economy, where many CAC 40 companies operate is also slowing, as evidenced by the weak import and exports data published on Wednesday.
CAC 40 index forecastCopy link to section
The CAC 40 index has retreated in the past few weeks. And on the daily chart, we see that the 25-day and 50-day exponential moving averages (EMA) have made a bearish crossover. Most importantly, the index has fond support along the ascending trendline shown in blue. It has failed to move below this point several times this week.
Therefore, the outlook of French stocks is currently neutral with a bearish bias. A break below the ascending trendline will signal that there are more sellers in the market who are keen to push it to the next support at €6,815 (March 20th low). The alternative scenario is where the index jumps to the year-to-date high of €7,567.