ECB Hopes Buoy Indices Despite Leadership Crises

Political turmoil across Europe roils markets, but traders appear more optimistic about the potential for ECB easing than they are worried about a slowing economy.​

Politicians Groan, Markets Cheer

The two largest countries in Europe are currently facing leadership crises, but at least in one case, the French situation appears to be resolved from a market perspective. Last week, French Prime Minister Michel Barnier lost a no-confidence vote but was asked by President Emmanuel Macron to remain in a caretaker role until a successor is appointed, potentially as early as Tuesday. The leadership turbulence sent French yields to crisis levels as investors worried about the country's ability to meet its financial obligations. However, the commentary has since become more relaxed.

The primary point of contention was the French Budget, as the country's deficit spending continues to exceed Euro limits. Nevertheless, the far-right and far-left that ousted Barnier have shown a willingness to pass a budget. Macron is negotiating with the Socialist Party to replace Barnier, which would presumably strengthen his political support and stabilise the situation. France's premier stock index, the CAC 40, has had a difficult stretch during the recent crisis, experiencing its worst year-to-date performance since 2010 in November. However, since Barnier's resignation last week, it has turned a corner and begun to rise.​

Slowing Economy, Accelerating Stocks

The situation in France contrasts with Germany, where there is an impending no-confidence vote against the head of government. Chancellor Olaf Scholz dismissed his Finance Minister around a month ago after he refused to increase spending in the midst of an expected recession by the end of the year. The dismissal ended the "traffic light" coalition, triggering a vote on Scholz's leadership scheduled for Monday, December 16. However, the DAX reached a new record high only last week, continuing its trend higher this year. Germany's struggling economy and the budget crises among the two largest economies in Europe seem to be providing investors with increased optimism that the ECB will ease at the fastest rate among major central banks next year, as a stalling economy translates into lower inflation.

As for the French index, which has fallen 10% since the political instability sparked by French snap elections in early June, the presumption could be that if the political situation stabilises, the CAC could turn around and join its counterparts in moving higher as risk appetite recovers. It is worth noting that many index components are large-cap companies that generate most of their revenue from outside France (similar to the DAX in Germany), which could help support the market despite concerns about the domestic economy.​

CAC 40 Rebounds Following Flag Pattern

The French index might have formed a falling flag pattern at 7085, indicating a potential continuation to 7810 and an eventual revisit of 8250 over the medium term. However, if bulls fail to reclaim the latter resistance or extend towards 7590, a possible long-term head-and-shoulders pattern could lead to further declines below 7025 and towards the neckline at 6750.​

Source: SpreadEx / France 40

Key Takeaways

Despite the leadership crises in France and Germany, markets appear optimistic around the possibility of more aggressive ECB easing due to slowing economies in Europe. Prime Minister Barnier lost a no-confidence vote in France but remained in a caretaker role, while Germany's Chancellor Scholz faces a no-confidence vote on the 16th after dismissing his Finance Minister. However, both the CAC 40 and DAX burses have recently risen, implying investors are pricing in more aggressive easing by the ECB to combat lower inflation from a stagnating economy. This suggests that the CAC 40's underperformance could continue its recent reversal if France's political situation stabilises.​