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Status of French CAC-40 (March 2020)

This post is also available in: French

Excerpt from: “Crystal Ball for Investing and Trading” Book.

Status of French CAC-40 Index

CAC-40 represents the French stock market index, which comprises the 40 highest capitalization companies traded on the floor of Paris Stock Exchange (La Bourse de Paris). France is the second eurozone economic power and like Germany is a member of the 16 Eurozone countries. Therefore, comments related to the ECB QE programs for DAX apply also to CAC-40.

To counter the economic consequences of COVID-19, France decided a relief package of 350 billion euros, equivalent of 15% of its GDP, in mid-march 2020. The French Central Bank considers that the amount can go as high as 700 billion euros.

Figure 13.9 shows a monthly chart of CAC-40 from 1996 to March 20, 2020.

The first thing we can observe on the chart is the contracting triangle from mid-2000 to February 2020.

 The following points are worth highlighting:

  1. From 1995 to 2000, CAC-40 rallied like all other main indexes and went from approximately 1,800 up to 6,856.76 on September 5, 2000, the date of CAC-40 all-time high.
  1. Wave A corrected some 4,450 points from the top, or some 65%.
  1. Like DAX, its wave B did not manage to bring it above the all-time high of 2000. We know that DJ-30 did well make a new all-time high in 2007.
  1. Wave C caused a more severe loss than for DAX. It bottomed in the lower area of wave A.
  1. Wave D failed to lead CAC-40 above the all-time high of 2000, or even the top of 2007. It achieved a top price of approximately 6,400 on February 12, 2020.
  1. Subwave E (or wave 4) should most likely break the horizontal support line of around 2,200 downward.
  1. Despite the aggressive QE program of 2015 by the ECB, CAC-40 has failed to make a new all-time high.

You may agree that despite the Japanese, the US, the UK, and the ECB QE programs, CAC-40 did not seem to profit sufficiently to propel its price above the all-time high of 2000. France has clearly been in correction mode since 2000.

This situation conveys a positive and a negative message. The positive message conveys that because of the mild benefits from the QE programs, the effects of wave E correction should be relatively mild too because the French economy does not rely much on exports, like Germany. The negative message confirms that France has a very weak economy among the developed industrial countries.

Figure 13.9 – Charts courtesy of

Like CAC-40 performances, the state of the French economy and finances is weak. The France biggest problem consists of its rather rigid labor regulations, weak participation in trade unions, and sporadic and too frequent labor strikes.

This situation leads often to an easy escalation of labor right conflicts between a given company and its employees, to a political crisis for the whole country and government. It is not uncommon that workers of a certain branch paralyze the entire country’s economy in the name of the right for strike and take hostage the users of e.g. transportation services in Paris to exert pressure on their employers and government.

It should be up to the government to ensure that while the employees have the right of going on strike, the users of such services like transportation must also have the right of freely going to work. Several times, recent blockade of e.g. crude oil refineries have brought the whole economy to still stand while the conflict affected only workers of a given tiny economic sector.

Abuse of such right damages drastically the image of France as a reliable and safe country for foreign investors, and with direct and immediate negative impact on the country’s GDP. France has a minimum wage regulation that enforces a minimum salary of over €1,400 for any employee, even unqualified. Consequently, the labor forces with low qualification cannot get access to the job market and must live with the government social benefits.

Lowering the level of SMIC (Salaire Minimum Interprofessionnel de Croissance – guaranteed minimum wage) from over €1,400 to some €1,000 could create a substantial amount of new jobs and give a huge relief to France’s social protection system. This could then result in lower taxes for the companies and working employees.

France recorded a Government Debt to GDP of 98 percent (Maastricht definition) or 124.9 percent for 2017.

The public debt to GDP of France averaged 54 percent from 1980 to 2017, reaching an all-time high of 98 percent in 2017 and a record low of 20.70 percent in 1980.

After many years of unbalanced budget, the budget deficit was projected to fall below 3% in 2017, but failed. As a result, the level of debt continues to grow in 2020.

For 2016, France GDP was €2,228.9 billion or some €2.23 trillion.

Like the US, the French government debt is a matter of serious concern. Based on the state of the French economy, it is highly unlikely that the government will be able to pay back its debt of approximately €2.1 trillion with a predicted GDP growth of 1.5% for 2017 and an inflation rate close to 0% in 2016. The French unemployment rate has recently slightly decreased to around 9.5 of labor force but is still well above the one of Germany.

One objective of ECB QE program was to keep the level of interest rates low and close to zero, to enable the Eurozone countries manage servicing their sovereign debt.

The third and fourth major European Union and Eurozone member countries are Italy and Spain. For Italy, the state of economy and finances is even worse than in France.

For 2017, the Italian GDP growth was estimated at 1%, the unemployment rate at 11.5% and the debt to GDP of 131.8 percent (Maastricht definition) or 157.4 percent.

Concerning Spain, the situation is not much better. The GDP growth rate for 2017 was estimated at 2.4%, the unemployment rate at staggering 19.6%, and the debt to GDP at 117.2%.

France, Italy, and Spain can still service their high level of sovereign debt because the Fed and ECB have managed to engineer an environment of extremely low interest rates. With such a high rate of debt-to GDP, low interest rate, sluggish GDP growth and high rate of unemployment, these countries are highly vulnerable to higher interest rates.

The recent economic improvements seem to be the result of the ECB QE program which has injected some two trillion euros in the eurozone economies. Normalization of interest rates and potential unwinding of the ECB balance sheet are certainly going to stress the viability of the eurozone banking system and economies.

Based on above analyzes and with the predicted correction of DJ-30 wave E, the French government would most likely have to declare a disguised form of bankruptcy around 2022.

This event could then cause severe shake-ups of the eurozone and of the European Union. Most likely, Germany and the Northern Eurozone countries would be unable, economically and financially, to bail out any of three major southern Eurozone countries such as France, Italy, and Spain.

From political viewpoints, a major risk of extremism of all kinds getting access to political power in a few countries do exist. In France, the far-right party “Front National” has already become one of strongest French political power, even though DJ-30 was still achieving new all-time highs in 2019.

Majority of views expressed concerning the state of US economy and finances of chapter 9 apply to many of Eurozone countries as well.

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