CAC 40: no 'Christmas rally' despite the ECB?

(CercleFinance.com) - The Paris Bourse is set to open slightly lower on Monday morning, in a climate tinged with caution ahead of Thursday's meeting of the ECB's monetary policy committee.


At around 8.15 a.m., the CAC 40 'future' contract - for delivery at the end of December - fell 11.5 points to 7426.5, heralding a modest consolidation after the index's recent rebound.

Despite the worsening of the French political crisis due to the fall of the Barnier government, the Paris market had managed to gain 1.3% to 7,427 points by the end of Friday's session.

With five out of five sessions up last week, the CAC gained 2.7% for the week, ending a run of six consecutive weeks of declines.

"As expected, there was no stock market psychodrama after the censure", observes Christopher Dembik, Investment Strategy Advisor at Pictet AM.

The reality is that the market has perfectly understood that a debt crisis in France is a fantasy scenario", explains the analyst.

Although the Paris market got back on track last week, it is far from certain that the Paris Bourse will enjoy a very positive end to the year, says the professional.

"Now that the censorship episode is over, the question is whether a Christmas rally is conceivable for the CAC 40?asks Christopher Dembik.

"We think it's going to be complicated", he believes.

"Savers have perfectly understood that if they're looking for yield, it's better to hold US assets than French ones", adds the Pictet AM strategist, who points to the outflow of money from France to the USA.

"Unfortunately for the Paris Bourse, this is likely to become more pronounced", warns Christopher Dembik.

In his view, it would not be altogether surprising if the CAC 40 ended the year below the symbolic 7,000-point mark, which would correspond to a decline of around 7% for the year as a whole.

By way of comparison, the S&P 500 has risen by more than 27% since January 1.

Fears that the ECB will opt on Thursday for a limited 25 basis point cut in its key rates - rather than a more aggressive 50 basis point easing - could also weigh on the trend and prevent the traditional "Christmas rally".

Faster rate cuts would, in our view, be better suited to the European economic situation, but the euro's decline seems to be scaring off central bankers", notes François Rimeu, senior strategist at Crédit Mutuel AM.

Traditionally, equity markets tend to rise in the last few weeks of the year, driven in particular by balance sheet packaging, with the S&P index in the USA recording an average gain of over 2%.

The S&P, which has set one record after another in recent weeks, has already gained 1% since the beginning of the month.

In addition to monetary policy, investors are preparing for Wednesday's release of the US consumer price index, which will be particularly closely watched one week ahead of the Fed's last meeting of the year.

According to the consensus, US inflation should have accelerated to +0.3% month-on-month in November, after coming in at 0.2% in October.

On the energy market, oil prices resumed their upward trend on Monday, supported by the reappearance of geopolitical risk and concerns over the unrest in Syria following the fall of President Bachar Al-Assad.

Brent crude recovered 0.6% to $71.5 a barrel, while the January contract for US light crude (WTI) gained 0.6% to $67.6 a barrel.

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