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Assessing Europe's Economic Appetite Amid Political Uncertainty

Published 06/20/2024, 02:27 AM

Appetite in Europe was weak yesterday in the absence of American markets. The French CAC40 remained firmly offered near its 200-DMA and fell 0.77%, the European Stoxx 600 index retreated 0.17%, and the Swiss SMI consolidated above the 12’000 mark while the FTSE 100 took out the 50-DMA and closed slightly higher at yesterday’s trading session.

The French political risks remain on the headlines and many investors are reluctant to go back to the French and European stock indices ahead of the upcoming legislative elections as they fear that a victory for Marine Le Pen’s National Rally could further hit valuations. But the European stock valuations remain attractive as they are way cheaper than the US peers, and some investors make a parallel between France and Italy – which also saw its assets hit by Meloni’s rise to power as Draghi resigned, and point that, in fine, Meloni has successfully kept investors in check and Italy ended up being fine.

Crude’s Rise

Crude oil consolidated gains above $80pb and remains supported by positive trend vibes since it stepped into the medium bullish consolidation zone after it cleared the major 38.2% Fibonacci resistance on the April to June rally. The geopolitical tensions, tight OPEC supply, the rising summer demand, and reflation appetite are among the factors that support the rally, while high US and non-OPEC production and a potential weakness in reflation inflows are the major risks to the actual positive formation. The next crucial support stands at $82pb, the major 61.8% Fibonacci retracement, that will either call the end of the latest positive push or confirm the strength of the rally. I believe there is more chance we see the first scenario unfold rather than the second.

A Decision Day!

The day will bring three important policy announcements on top of China’s. China maintained its rates unchanged today at record lows, as expected, and the People’s Bank of China (PBoC) signaled a new toolkit that could allow the Chinese central bank to start buying government bonds – which would be a new way of injecting liquidity into the markets. But alas, the Chinese CSI index continues to be offered into its 200-DMA as the PBoC refrained from cutting the rates this week and the Hang Seng index gave back a part of yesterday’s strong gains.

Closer to home, the Norges Bank, the Swiss National Bank (SNB) and the Bank of England (BoE) will announce their latest policy verdicts today.

SNB expectations differ from poll to poll. The consensus on a Bloomberg survey hints at no change in rates today in Switzerland while a poll from Reuters suggest a 25bp cut to 1.25% following a 25bp cut from the European Central Bank (ECB) earlier this month. The USD/CHF cleared the all-important 200-DMA and major Fibonacci support this week and slipped into the bearish consolidation zone.

The euro-franc fell to the lowest levels since February – the fall is amplified by the French political jitters. A potential rate cut from the SNB could eventually slow and stop the franc’s appreciation – especially against the greenback - and send the USD/CHF back to a bullish path and I think a 25bp cut would make sense as the SNB has margin on the inflation front to make this move and support the economy.

For the BoE, things are more complicated. Yesterday’s CPI release showed that headline inflation in the UK fell to the BoE’s 2% policy target and the UK ended up being – against all odds at this time last year – the first nation among comparable peers to make this achievement. Yet two things worry the BoE doves and slow down rate cut expectations. First, services inflation remains high – perhaps too high near 6% - to let the BoE cut rates with a peace of mind as services make up around 80% of the British economy.

And second, consumer prices could rapidly rebound if the natural gas market tightens as traders rush to replenish their stockpiles before winter. As such, if the BoE doesn’t announce a rate cut today, it’s not because they don’t want to put their nose into the country’s political affairs with the upcoming general election, but it’s mostly because the underlying inflationary factors are not yet convincing enough to allow them to do so.

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