After 8 weeks of continuous rally – a phenomenon that has only happened 8 times in 35 years! -, CAC 40 has held at high levels this week, even hitting a new peak since March! Stock market investors continue to hope for a change in the Fed’s monetary policy, which is expected to gradually become less tight, even if the unbridled enthusiasm of market participants is questioned by many observers. Jerome Powell “still has to wonder what he could have said on Wednesday for the market to believe that he confirmed the rapid reversal of the central bank’s trajectory that was already included in the forecasts for several weeks,” La notes in this regard. Post Bank Asset Management (LBPAM).
However, long-term rates in the US fell sharply, returning to 3.5% on Thursday, i.e. to the previous peak in June last year (hence an important technical threshold). This fall in long-term rates has particularly benefited technology companies and growth stocks, which are traditionally particularly sensitive to this phenomenon. “It is likely that some investors chose to leave only positive statements (from Jerome Powell) to be comforted by the confirmation received that the pace (rhythm) of future rate increases, as well as Jerome Powell’s insistence that he thought a recession could always be avoided,” explains LBPAM.
Stock market: CAC 40 has been rising for 2 months now, beware of backlash
Inflation, rates… excessive and premature optimism in the stock market?
Jerome Powell “reiterated that the Fed has not yet finished raising key rates and that despite some good news on inflation, we are far from reaching the goal of price stability,” however, emphasizes the asset manager, who says he remains doubtful of market confidence in a possible change in the course of monetary policy and optimism about the future economic trajectory. While the upcoming adjustments to lower activity and employment should lead to lower inflation, they should also weigh on earnings forecasts for listed companies, posing a risk to share prices.
For six weeks, “expansive optimism supported the stock market. It is based on the belief that inflation has already peaked, at least in the United States, that the nature of inflation is essentially cyclical, that we are moving towards a gradual normalization that will allow us to return to pre-Covid, both price pressure and interest rates. Markets want to consider returning to normal soon,” notes Optigestion, for whom this escape seems to him “premature and excessive.”
The nature of inflation “is like a fluid that spreads and then permeates the economic fabric. It proceeds by slow contamination of the actors. Many companies have yet to suffer the effects of higher prices due to favorable hedges that have protected them in 2022. Just as many tariffs have not expired yet, these hedgings will phase out over the course of 2023,” warns the asset manager. .
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Listed companies could suffer in 2023, stocks could return to volatility
Raising rates “is bound to raise the cost of debt, deter investment, and hurt balance sheets. The reduction in the central bank’s balance sheet has just begun. Its consequences will not remain unscathed!” warns Optigestion, which is better off waiting to measure the impact of inflation spreading and rate hikes.
So far, the results published by listed companies have been quite good and encouraging, as many multinationals have taken advantage of apparent pricing power (the ability to pass on extra costs to selling prices for customers). Third quarter reports “continue to reflect a positive price effect. Well-informed companies were able to quickly adapt. But volume effects, negative and more pernicious, must follow. A second increase in prices will soon meet more resistance and affect margins,” warns Optigestion, for which the reduction in consumer purchasing power will lead to a drop in demand, and the expected increase in unemployment should contribute to a worsening social climate.
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China is gradually easing its zero Covid policy, our luxury giants are taking advantage.
On the good news, while China is showing signs of weakness on the economic front, it is nonetheless slowly weakening in its fight against Covid-19. “It’s more or less official, the zero-tolerance policy as we know it is over,” LBPAM says. This is what we can understand from a statement by Chinese Vice Premier Sun Chunlan indicating that the fight against Covid is entering a “new phase”. In particular, she insisted that the new variant was less lethal and therefore less dangerous.
Thus, “everything will probably be done to calm the ongoing protests by introducing real confinement-related easing in the coming weeks,” said the LBPAM judge, for whom “it will be gradual, because a strong increase in infections makes it difficult to move quickly, on the one hand among the most vulnerable and poorly protected populations in terms of vaccination.” Loosening Beijing’s Covid-19 policy should support the struggling Chinese economy. Hopes for China have especially benefited the French luxury giants (LVMH, Kering, Hermès, etc.), which are quite open to Chinese consumers.
Momentum is out of the game
Momentum, Capital’s premium investment letter and stock market newsletter, performed well overall this week. While the CAC 40 hasn’t changed much in the past 5 days, many stocks (LVMH, Hermès, L’Oréal, Prodways, Kering, EssilorLuxottica, TFF, etc.) have performed well in our sample.
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This week, Momentum analyzed the outlook (up or down) for the CAC 40 and many stocks (LVMH, Renault, Veolia, Kering, Airbus, Alstom, TotalEnergies, Remy Cointreau, etc.), not to mention bitcoin, for cryptocurrency enthusiasts.
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