The stock market: these dangers that could cause the CAC 40 and the Nasdaq to fall

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CAC 40, Nasdaq, Dow Jones… An overview of the risks that could cause the stock market to stumble, while French and European stock markets are already suffering from political risk in France.

Last week, the Paris Stock Exchange suffered in particular. And the European stock market, relatively more resilient, still followed suit. Asian stock markets and Wall Street outside the Old Continent are also not indifferent to concerns related to the political crisis in France and the outcome of the European elections, although their reaction was more measured. Uncertainties that add to the big uncertainties that already shape the pace of global economic growth and the extent of key rate cuts expected for the Fed and ECB.

Political risk in France worries the stock market. While the National Rally (RN) and the New Popular Front are on top in the polls, their economic programs are seen by the financial community as very – too – overspending, while France should be trying to restore its public finances at this stage, especially as the rating S&P has just sanctioned us by downgrading the country’s credit rating. RN Program”it is very wasteful and unfunded, with new spending of €110-120 billion», notes ABN AMRO Investment Solutions, which calculates that between the various planned measures (reduction of VAT on energy and other basic products, return to 60-year retirement, etc.) France’s public deficit”can be increased to 8%» compared to 5.5% of GDP in 2023, which would be the level a priori for interest rate and equity markets causing concern. Here’s an overview of the main risks currently weighing on the stock market.

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Political risks in France should be closely monitored

The 10-year rate differential between France and Germany, a barometer of the perceived risk of the situation in France, rose sharply last week. And the Paris Stock Exchange posted its worst weekly underperformance since 2022. However, if the National Rally wins an absolute majority in the National Assembly, the CAC 40 could once again experience a worse trajectory than other major stock indexes, warns Goldman Sachs, for which if the 2022 program RN applied to the letter, the stock market and the interest rate market could take a serious hit.

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According to the American establishment, the shares of banks, construction and materials companies and collective services giants could be among the most affected on the Paris exchange. According to Goldman Sachs, the defense sector could also be neglected. Fortunately, “all major parties want to stay in the EU and Eurozone. And President Emmanuel Macron will retain veto power. Soothing points», says LBP AM, asset manager at La Banque Postale, which hopes for a medium-term recovery in French and European stocks.

Inflation could be an unpleasant surprise, according to what will the Fed and the ECB decide on rates? And how will the stock market react?

Inflation in the United States remains a bit too high, according to the University of Michigan Survey of American Households. So, “inflation expectations rose slightly in June. Their rather high level is another reason for the Fed to remain cautious in the short term and wait for further signs of disinflation before cutting its key rates, despite relatively comforting inflation data in May.», judge LBP AM. With the exception of energy and food (items known to be volatile), inflation remains stubborn in both the United States and the eurozone, ABN Amro IS points out.

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Disinflation has so far been supported by the favorable development of commodity prices, but this phenomenon should subside. And energy prices remain subject to geopolitical risks, so inflation risks are rising for 2025, ABN Amro IS reckons. Excluding rents, service sector inflation has been accelerating in the United States in recent months. So if wage pressures were to remain strong enough, US inflation could remain strong. ABN Amro IS thus remains cautious about the trajectory of US inflation in the six-month horizon. Given the slowdown in productivity, persistent wage pressures could prompt firms to raise prices, which would again be negative for the inflation outlook.

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In the eyes of ABN Amro IS, the ECB is – unlike the Fed – in a relatively comfortable position at the moment (albeit with some lingering upside risks) due to the slowdown in consumer price growth in the Eurozone. , for now. However, it will have to find the right calibration in terms of key rate cuts. Indeed, too many cuts could revive inflation, while too few cuts could lead to a slowdown in economic growth.

And watch out for the trajectory of the euro, whose possible (and according to economist Marc Touati, president of ACDEFI, likely) continued depreciation would encourage imported inflation (a mechanical increase in the price of goods imported into the eurozone). The Fed’s task promises to be more difficult than that of the ECB, as inflation is relatively more resilient in the United States than in the euro zone, while US economic growth has begun to weaken, according to ABN Amro IS, for which the timetable for further key rate cuts is uncertain. It will depend on the trajectory of US inflation and the labor market across the Atlantic.

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Economic growth needs to be monitored, paying attention to the company’s margins

The US economy is starting to show signs of slowing down. And while excess savings linked to the Covid-19 crisis have completely dissipated, household spending should stop, ABN Amro IS predicts. According to the bank, further tightening of credit conditions and a decrease in loan applications are expected in an uncertain economic environment. While funding costs remain high and wage pressures remain strong, listed companies’ margins could fall somewhat.

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Beware of geopolitical risks

In addition to political risk in France and Europe, many sources of geopolitical instability remain on the planet. ABN Amro IS emphasizes that the risk of an escalation of the situation in the Middle East with Iran and Yemen cannot be ruled out. Watch out for further disruptions to shipping through the Strait of Hormuz. Also watch out for tensions between China and Western powers. The United States just imposed tariffs on Chinese electric car imports and the European Union just followed in Uncle Sam’s footsteps. And if Donald Trump wins against Joe Biden in November (which is quite likely), new protectionist measures could add fuel to the fire. Ultimately, the question of Taiwan’s fate remains unresolved.

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CAC 40, Nasdaq, Dow Jones… The stock market could experience new bouts of volatility in the coming months. Especially since a lot of risk remains on the table and summer is a season that traditionally leads to some volatility in stocks. Momentum, Capital’s premium stock market investment newsletter, correctly predicted the recent decline in the CAC 40. Discover our daily deciphering and expectations for the CAC 40 and listed stocks. To register, just click on the link above in this article. Also discover my new book Chartist figures of technical analysis (Stock market win with continuation and reversal numbers), best to invest in the markets.

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