CAC 40: sharp decline ahead as Fed changes tone

(CercleFinance.com) - The Paris Bourse is set to open sharply lower on Thursday morning, following in Wall Street's footsteps, cooled by the US Federal Reserve's less accommodating than expected stance on the trajectory of its rates for 2025.


At around 8.15am, the 'future' contract on the CAC 40 index - December delivery - fell 110.5 points to 7277.5 points, suggesting a decline of more than 1% in early trading.

As expected, last night the Fed cut its key rates for the third time this year, reducing them to a range of 4.25% to 4.50%.

However, Fed Chairman Jerome Powell surprised the markets by suggesting that the central bank had entered a "new phase" in its policy, marked by a slower pace of rate cuts than previously expected.

The new projections show that the institution is now expecting only two rate cuts next year, compared with the four previously anticipated by investors.

After only three rate cuts, the Fed is already saying that it is entering a new phase in its monetary tightening," begins Bastien Drut, head of strategy and economic research at CPR AM.

"The recent halt to disinflation and the uncertainties linked to the policies of the future administration will push the Fed to be much more cautious," says the analyst.

It will only lower rates again if there is further tangible progress on the inflation front", he stresses.

This flood of unfavorable news sent the New York Stock Exchange tumbling last night, as investors hoped for a more accommodating tone from the Fed in view of the uncertainties surrounding the evolution of the global economy.

The Dow Jones index shed 2.6%, while the broader S&P 500 lost 3% and the Nasdaq fell 3.6%.

In a sign of the anxiety gripping the markets, the CBOE Volatility Index, nicknamed the "fear index" on Wall Street, jumped from 16 to 28 points, reaching its highest level since the volatility episode of last August.

At this stage, futures are reporting only a modest rebound of around 0.1% in the major New York indices at the opening on Thursday.

Elsewhere, the entire financial world is seeing red.

On the Tokyo Stock Exchange, the Nikkei index posted a limited decline (-0.7%) at the end of the session, as concerns over the evolution of US interest rates rekindled risk aversion.

On the bond market, Powell's hint of a tighter-than-expected monetary policy in 2025 sent the yield on 10-year Treasuries soaring, reaching over 4.52% last night.

The rise in US bond yields continued to support the dollar against the euro, with the latter breaking through the 1.04 barrier against the greenback to return to 1.0395.

Crude oil prices were also caught up in fears, with Brent down 0.4% to $73.1, while US light crude dropped 0.5% to $70.2.

The trend in Europe could change slightly with the Bank of England's monetary policy decision, expected at 1:00 p.m., although the recent reawakening of inflation in the country is leading many analysts to bet on a "status quo".

Investors will also be keeping an eye on a series of economic indicators, notably the third estimate of US GDP for Q3.

Good figures could reinforce the scenario of a less accommodating policy than expected on the part of the Fed, following the solid economic indicators published in recent weeks.

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