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After the ECB Governing Council last week, it’s time for the Monetary Policy Committee, the equivalent for the Fed (Federal Reserve) this week. It is on September 18 that the powerful monetary institution led by J Powell will end its FOMC, with the key to formally entering a cycle of rate cuts. The question that remains is the extent of this drop in Fed Funds remuneration: -25 or -50 basis points.
“The decision on a 25 versus 50 basis point rate depends on whether the FOMC is willing to ease aggressively before labor market strains materialize, and there are good reasons to think the Fed should start strong before quickly returning to a neutral stance,” Pictet AM strategists anticipate. “However, in past cycles, large cuts have typically coincided with significant strains in labor markets or financial conditions. While Fed officials have not ruled out a 50 basis point cut, we do not believe the committee’s consensus has been reached yet given the current economic situation.”
Last week, the Governing Council of the European Central Bank ended without surprises with a further loosening of the monetary tap, by 25 basis points. The powerful pan-European monetary institution lowered (slightly), but for 2024, 2025 and 2026, growth.
William Vaughan, Associate Portfolio Manager at Brandywine Global (a subsidiary of Franklin Templeton), continues “to believe the ECB will cut rates to a neutral stance around 2%, probably at a pace of once a quarter, with the next cut in December.”
“However, the new macroeconomic forecasts published were interesting as they continue to overestimate growth over the coming years and will continue to be revised downwards over the next few forecast cycles. The ECB’s rate-cutting cycle could accelerate if growth continues to disappoint,” the asset manager notes.
“Mr Draghi’s recent report highlights some of the key challenges facing the eurozone, but spending more than €700 billion a year, as has been suggested, seems unrealistic given the current political climate,” notes William Vaughan, Associate Portfolio Manager at Brandywine Global. “Without significant fiscal changes, it is difficult to see a major growth catalyst emerging in Europe any time soon.”
The CAC 40 gained 0.41% on Friday for a closing exactly at 7,465 points, the major graphic level that acts as a pivot threshold. Above that, breathing space is assured up to 7,690 points. Below that, the resumption of bearish tensions is to be feared.
In the statistical chapter, operators have taken note of a monthly contraction in industrial production in the Eurozone (-0.3%) less severe than anticipated (-0.6%), which provides some support to the single currency, in the chronic context of fear over the health of industry in Germany. Across the Atlantic, the preliminary data of the consumer confidence index (U-Mich) slightly beat expectations, coming out on Friday at 39.0 points.
On the other side of the Atlantic, the main stock indices ended Friday’s session in green territory, like the Dow Jones (+0.72%) and the Nasdaq Composite (+0.65%), with a strong technological coloring. The S&P500, a reference barometer of risk appetite in the eyes of fund managers, rose by 0.54% to 5,626 points.
An update on other risky asset classes: around 8:00 this morning on the foreign exchange market, the single currency was trading at a level close to $1,1100. The barrel of WTI, one of the barometers of risk appetite on financial markets, was trading around $68.00.
On the agenda this Monday, to follow as a priority the trade balance in the Eurozone at 11:00 a.m. and the Empire State manufacturing index at 2:30 p.m.
KEY GRAPHIC ELEMENTS
The key short-term chart levels were precisely hit: Friday, August 30 at 7,645 points, followed by a failure; and Wednesday, September 4 at 7,482 points, a handful of points from the 7,465 points below which a new bearish leg would form. This last level experienced a first alert on Thursday, September 5.
The fact that the leading French index ended at the lowest level of week 36, just after breaking the threshold, is decisive. It sends a message of short-term weakness.
The key threshold to watch is 7,465 points, below which the opinion will remain negative.
Above, breathing is assured up to 7,690 points. Below, the resumption of bearish tensions is to be feared.
FORECAST
Considering the key graphic factors that we have mentioned, our opinion is negative on the CAC 40 index in the short term.
This bearish scenario is valid as long as the CAC 40 index is trading below the resistance at 7465.00 points.
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