Three partly integrated risks… but to be dissipated, Indices trading strategy

The Cac 40, like the other European indices, remains faced with three risks: inflation with the themes of monetary normalization, geopolitics with Ukraine and health with confinements in China.

The most immediate risk remains that linked to geopolitics, with strong macroeconomic implications linked in particular to the prices and availability of raw materials, but also to the impact on consumer and business morale. This geopolitical risk, which has fueled already high inflation, itself has implications for the path of interest rates, with repercussions for both cyclical and growth stocks.

The latest inflation figures in the United States for April showed a slower increase than in March, at 8.3% over one year, against 8.5% previously. The same goes for the producer price index. This is therefore the very first good news, although very slight, on the price front and therefore for investors. But the next inflation release would need to show a second consecutive slowdown in price growth to confirm the sentiment of a peak forming. Because the initial reaction of the markets after the announcement rather showed disappointment, in particular due to the monthly increase in “core” inflation (excluding food and energy) and the fact that the rise in prices in services mainly contributed to the April inflation figure.

Because a sharp rise in prices in services will keep the Fed on alert for several more months. Jerome Powell, who recently spoke, went in this direction by almost confirming a rate hike of 0.50% at each of the next two meetings.

And on the side of the ECB, which has still not carried out its first rate hike, no leniency to expect either in terms of communication, in particular with the euro which has fallen below 1.04 dollars in recent days. , its lowest level since 2017… and no longer very far from the levels of 2003. The fall in the euro is fueling imported inflation, the members of the ECB no longer have any short-term room for maneuver accommodating.

A respite for the euro would come either from US inflation, which would confirm an inflection, or from an easing on the geopolitical front. This last element would probably be the “game changer”. The resumption of diplomatic discussions, or even outright a ceasefire would have immediate consequences on European indices, would allow the euro to rebound and energy commodities to decline very significantly. We could easily have a 10% to 20% drop in oil prices on an easing of the Ukrainian crisis, which would have consequences on the bond markets and quickly allow central banks to limit their rather “aggressive” rhetoric in recent months.

Finally, the announcement of deconfinements in China would also alleviate the general feeling about logistical tensions and shortages and allow luxury stocks and cyclicals to rebound.

We are not necessarily very far from arriving at this situation and the inflation figures in the United States have perhaps begun to open the series of “good news” or rather “less bad news”.

But as long as nothing comes from Ukraine or China, the risk is to see the Cac 40 continue to hesitate, or even continue its correction. However, the low point in March seems to constitute the somewhat “ultimate” chart risk. If this level were found in the days or weeks to come, a double dip could then form and the index would continue to consolidate for some time between the historic high (index excluding dividend) in January close to 7,400 points and this low point in March. at 5,756 points. In general, the area between 5,600 and 5,800 points is very dense from a graphical point of view. The Cac 40 having already priced many risks in recent months, it should not seek to pass through this zone which should offer lasting support.

To begin to confirm the end of the decline and a change of mindset of investors, the Cac 40 must review the 6,600 points (technical zone above which the last rebound had failed). Without being very negative for all that, it is difficult to be bullish in the short term on the Cac 40 as long as it does not close one or two weeks in a row above 6,600 points.

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