The beginning of the year had started well for the Cac 40, which benefited from a new rotation towards cyclical stocks/value to the detriment of growth stocks, penalized by the rise in rates and in particular real rates.
Even if this rotation has been maintained in recent days, in a more relative way, cyclical stocks are correcting in an orderly fashion under the cumulative effect of geopolitical risks (Russia) and fears related to China, which continues to apply restrictions strong sanitary facilities in view of the Olympic Games. This proximity to the event is forcing the authorities to apply a drastic “zero-Covid” policy, the collateral effects of which are numerous: an effect on domestic demand, as evidenced by the weak growth in retail sales in December, more two times lower than consensus expectations, disruption of global supply chains due to congestion in Chinese ports and, in turn, shortages in certain sectors of activity as well as high costs.
Added to this are fears about the real estate market and the financial strength of Chinese developers. This fragility weighs heavily on the high-yield bond compartment: the value of Chinese high-yield bonds recently fell to its lowest level since… the end of 2018. That is to say below the low point that had been recorded in the stronger from the first wave of Covid in the first half of 2020! Note however, at the end of last week, a small attempt at a rebound in “high yield” bonds, which needs to be confirmed over several days and while waiting to see an ostensible reaction on the Chinese equity markets.
The Cac 40 is also suffering somewhat from the normalization of the monetary policy of the Fed and the ECB, to a lesser extent, however, than the indices that are much more exposed to growth stocks, such as the Nasdaq indices. It is a much faster monetary policy normalization than the previous one that has started to take place in the United States. And the markets have started to integrate this development since the beginning of the month with a rebound in rates and in particular in real rates (indexed to inflation), which mechanically reduces the TINA effect. Medium-term inflation expectations in the US have also started to price in the Fed’s tougher stance and have recently fallen back to a three-and-a-half-month low.
On the European side, the language of the members of the ECB and its president, Christine Lagarde, is still relatively accommodating, indicating that the pace of normalization in Europe will not be the same as in the United States. This could be a supporting factor for European markets in the coming months. We still note, however, the return of the German 10-year rate above 0% in recent days and a small widening of the Germany-Italy 10-year rate spread, maintaining this “atmosphere” of monetary normalization and somewhat slowing down the Cac 40 in the short term.
However, the medium-term risks do not seem very high for European stocks, and in particular those of the Cac 40, which are currently digesting several fears. The volatility of the Cac 40 and the Dax is moving above 20, which reflects an integration of risks, but not panic for all that.
It is important to “zoom out” the Cac 40 from a graphical point of view to see the levels of correction that the index may possibly reach in this phase of stress. These levels are the old historical high of 2020 (index excluding dividends) at 6,944 points, then the slant passing through the highs of 2010 and 2015, currently at 6,800 points, and finally the slant passing through the lows of 2010, 2012 and 2014, currently at 6,500 points. These three levels seem likely to absorb the “shock” of a correction if it were to increase in the coming days, before resuming the assault on the peaks. These are therefore rather entry opportunities, if these levels were to be revisited, rather than crossing points for a market reversal.
In the very short term, it does not seem appropriate to me to rush into the Cac 40 to “buy the dip”, rather wait for one or two good news to impact the market (China, Russia easing, central bank, inflation decline, etc. ) bringing it back to the 7,280/7,320 point zone. This should then be the starting signal for a new rally… but not before.
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