CAC40: close to equilibrium before Fed decision

(CercleFinance.com) - The Paris Bourse began the session on a cautious note on Monday morning, as investors awaited the Fed's announcement of measures to support the economy at its monetary policy meeting this week.
The CAC 40 index is close to breakeven at around 7,470 points.

The US Federal Reserve is likely to announce a rate cut on Wednesday evening, but investors are waiting to see how deep the cut will be, and fear disappointment as the central bank has fuelled expectations in recent weeks.

In view of the slowdown in employment, Fed Chairman Jerome Powell said at the end of August that the time had come to initiate a cycle of monetary easing.

But it remains to be seen which lever the central bank will choose to pull, the big question being whether it will opt for a limited cut of 25 basis points or a more substantial 50 points.

The CME Group's FedWatch tool shows that 59% of investors are now betting on a 25bp rate cut on Wednesday, while only 41% are expecting a 50bp cut.

Many believe that the Fed has been too slow to act in view of the deterioration in a number of indicators, which justifies starting to hit hard this week.

Yet many analysts say they are still anticipating a cut of just 25 points given the solid fundamentals of the US economy, which could lead the Fed to disappoint.

'Officials still seem confident of a soft landing for the economy', point out the managers at Swiss private bank J. Safra Sarasin.

'This suggests that the Fed will cut rates by 25 basis points, while signaling its intention to continue with a series of consecutive rate cuts of the same magnitude', adds the Swiss firm.

Christophe Morel, chief economist at Groupama Asset Management, agrees: "The current situation does not justify a step of 50 basis points".

"The Fed should therefore cut rates by 25 basis points over the next three FOMCs, and then, in our view, pause for several months to observe the impact on the real economy", he prophesies.

With expectations high, the risk of disappointment is just as great.

Buoyed by the prospect of strong Fed action, US equity markets gained between 3% and 6% last week.

With a weekly gain of 4.1%, the S&P 500 index even recorded its best week of the year so far.

The Paris Bourse also benefited from this upward momentum, with a gain of around 1.5% over the past week.

It's true that, with the cycle of rate cuts underway on both sides of the Atlantic, the outlook for the world's stock markets looks brighter.

According to calculations by the teams at J. Safra Sarasin, Wall Street gained an average of 18% year-on-year following the start of a Fed monetary easing cycle, provided a recession was avoided.

According to the Swiss bank, the healthcare, consumer staples and technology sectors stood out during these phases, as did US government bonds and the dollar, which posted positive 12-month returns following the rate cut.

Conversely, copper and the materials sector generally posted losses, recession or no recession, adds J. Safra Sarasin.

The monetary dance will only begin on Wednesday with the Fed's decisions, as announcements from the Bank of Japan (BoJ) and the Bank of England (BoE) are due the following day.

Despite the recent slowdown in UK inflation, the BoE is likely to leave rates unchanged, as is the BoJ, which is expected to confirm its 'wait-and-see' approach favoured in recent months.

On the bond market, the growing prospect of a 50bp rate cut on Wednesday continues to push the yield on US Treasuries down, to 3.65%, to its lowest level since May 2023.

The return of risk appetite is also benefiting oil prices, with Brent gaining 0.2% to $72.2, while US WTI is up 0.4% to $68.9.

Gold, which gained 3.2% last week, is not to be outdone, with the ounce recovering 0.2% to $2,615.4 this morning to set new all-time highs.

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