CAC 40: China fuels optimism

(CercleFinance.com) - The Paris Bourse is set to open higher on Tuesday morning, with the implementation in China of a series of measures designed to support the economy and financial markets fuelling a return to risky assets.


At around 8:15 a.m., the 'future' contract on the October CAC 40 index was up 52.5 points at 7,572, pointing to a sharp rise in early trading.

Overnight, Beijing unveiled a series of initiatives ranging from lower mortgage rates for existing home loans to a forthcoming reduction in the reserve requirement ratio.

The Chinese central bank is also planning to create new monetary policy tools to support the stock market and encourage funds to flow into the capital markets.

The prospect of a Chinese economic recovery helped the Hang Seng index on the Hong Kong stock exchange to climb by 3.5%, while the CSI index of large-cap stocks in mainland China gained more than 3.7%.

Yesterday, the Paris market had ended the first day of the week without much direction, posting a minimal gain of 0.1% to 7508.1 points with less than 1.5 billion euros traded.

For the record, the CAC has rebounded by more than 5% since its annual low on September 6, supported by rate cuts from both the European Central Bank (ECB) and the US Federal Reserve.

While the star index made a decisive move by climbing back above the 7,500-point mark, and while economic momentum is clearly bullish at the moment, caution could nevertheless limit spreads ahead of the series of indicators expected in the coming days.

On Wall Street, the session will mainly be driven by the Conference Board's consumer confidence index, which is expected to have risen in September as a result of the Fed's accommodating action.

In Europe, investors await Germany's Ifo business climate index later this morning, which should confirm the sluggish economic situation in Europe's leading economy.

The New York Stock Exchange had started the week in cautious mode yesterday, with investors unwilling to commit too much ahead of the inflation figures due at the end of the week.

The Dow Jones (+0.1%) and S&P 500 (+0.3%) nevertheless set new all-time closing highs, while the Nasdaq index advanced by just over 0.1%.

The trend was also dampened by a bout of nervousness in the bond compartment, with 10-year paper flirting with the 3.80% threshold yesterday.

While the Fed's decision to "hit hard" by cutting rates by 50 basis points last week boosted stock markets, uncertainty over the future evolution of its policy is turning investors away from government bonds.

"The message sent by the markets is very clear", judges Michael Brown, strategist at Pepperstone.

The bond compartment feels that the Fed has acted (...) too hard, too fast, while the US economy remains fundamentally sound, with growth remaining robust and inflation still above its target," the analyst points out.

For Christopher Dembik, Investment Strategy Advisor at Pictet AM, this dynamic simply illustrates the fact that fresh money is now flowing into equities.

As expected, capital invested in money market funds is gradually beginning to be allocated to the equity market, in search of higher returns", he explains.

"According to Bloomberg, over the past week, $20 billion has flowed out of money market funds", continues the strategist.

This is a weekly level not seen since June", he adds.

"This fundamental trend should continue over the coming months, supporting the upward momentum of equities", concludes Pictet's strategist.

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