Here’s why the CAC 40 index is in a technical correction

The CAC 40 index has remained in a deep correction this week amid concerns about politics and exposure to the Chinese market. The index, which tracks the biggest firms in France, has dropped for six consecutive weeks and is hovering at its lowest level since August 5. It has retreated by over 13% from its highest level this year. 

France stocks exposure to China

The main reason for the ongoing retreat of the CAC 40 index is that many of the biggest companies have a big presence in China, a country that is not doing well.

Recent data shows that Chinese consumers have moved to save cash and are no longer spending as they did before.

That’s because many Chinese individuals have struggled since the real estate market collapsed. Unlike in the United States where people invest in stocks, real estate is the most popular asset in China. As such, many wealthy people struggled when it imploded.

Media reports have reported that many luxury malls were no longer as busy as they were before. And it is unclear whether the stimulus policies announced by Beijing will stimulate spending in the near term. 

LVMH, the biggest luxury group in the world, has dropped by almost 20% this year because of the Chinese slowdown. 

Similarly, as with Estee Lauder, L’Oreal Paris, a top player in the FMCG industry, has plunged by 26%. The most recent results showed that its sales rose at a slower pace than expected because of China’s challenges. Its sales stood at about $11.1 billion in the third quarter, lower than the expected $12 billion.

Kering, the parent company of Gucci, has also been one of the worst-performing companies as its stock crashed by 45% this year. The company has delivered several profit warnings this year as its sales in China imploded. The ongoing crash has cost the company billions of dollars in value.

Pernod Ricard, a top player in the alcohol industry, has slumped by 33% this year, while STMicroelectronics has crashed by 47%. 

Other top laggards in the CAC 40 index were companies like Capgemini, TotalEnergies, Dassault Systemes, and Eurofins Scientific. 

Weak European market and Trump threats

The other reason why the CAC 40 index is that the European economy is not doing well this year. Data shows that the bloc is not growing, mostly because of the weak performance of some of its biggest countries like France and Germany.

These economic challenges could worsen in the next few months if Donald Trump announces new tariffs on European goods. European countries will also respond with tariffs of their own, creating a sense of instability in the economy.

Many French companies in the CAC 40 have large operations in the United States, meaning that they could be affected by trade conflicts.

On the positive side, these issues may make the European Central Bank (ECB) more dovish in the next few meetings.

CAC 40 index analysis

CAC chart by TradingView

The weekly chart shows that the CAC 40 index has suffered a harsh reversal in the past few months. It has dropped to 7,140 euros, down from the year-to-date high of over 8,000 euros.

The index has moved below the 50-week and 100-week Exponential Moving Averages (EMA), meaning that bears are in control. Most notably, it has dropped below the lower side of the rising wedge pattern, a popular bearish sign in the market.

The Relative Strength Index (RSI) and the Percentage Price Oscillator have all pointed downwards. Therefore, the CAC 40 will likely continue falling in the near term as sellers target moves below 7,000 euros. This view will become valid if it slips below the key support at 7,046 euros, its lowest point in August.