DAX 40, CAC 40 upside continues despite political turmoil and weaker data

By Daniela Hathorn11:34 (UTC), 4 December 2024

Key topics:

DAX 40 looks to hold above 20,000 as positive sentiment continues
Weaker economic data feeds the inverse correlation between markets and the economy
French political turmoil could weigh on French stocks if no confidence vote succeeds

Sentiment in the stock market has remained positive this week, with European stocks taking the lead. The DAX 40 has reached a significant milestone by breaching 20,000 for the first time. The index has seen impressive momentum in the past week, up 4.7%, managing to break away from an area of sluggish consolidation.

DAX 40 daily chart

Past performance is not a reliable indicator of future results.

The positive sentiment in Europe seems to be stemming from relative calmness on the US tariff front, a weaker EUR/USD and the expectation of multiple rate cuts from the European Central Bank (ECB). The latest data has not been great. In fact, the German PMIs released this morning showed continued weakness in the German economy, and whilst it narrowly avoided recession for the third quarter of the year, the latest data suggests a recession is inevitable in the new year. There is also the added uncertainty that comes with the collapse of the three-party coalition government, resulting in a snap election being called for February.

However, companies in the DAX 40 are little exposed to Germany. This means that the domestic troubles have a limited impact on investor sentiment. It seems for now that markets are back looking for an inverse correlation between economic and market performance. This is because weaker economic data in Europe will enable the ECB to cut rates more aggressively in the coming months, leading to a lower terminal rate which creates a more favourable environment for growth to flourish in the future.

Political turmoil is also affecting France as it faces a possible vote of no confidence in Michel Bernier’s government after he attempted to force through a social security budget bill. The uncertainty has weighed on investors with French borrowing costs increasing substantially over the past few says, widening the gap with German bunds. French stocks haven’t been punished just yet as the wobble in the CAC 40 seen late last week has been quickly corrected, with focus also likely on the ECB and rate cuts. That said, the French index has faced some troubles in the last few months, as it has lagged its European and American counterparts, currently trading below its 2024 opening level.

CAC 40 daily chart

Past performance is not a reliable indicator of future results.

Mr Barnier believes there is still hope that he may survive the vote of no confidence by negotiating with opposition parties, but the general feeling is that he would lose the vote. If so, Macron will have to announce a new government, which wouldn’t happen until next year. The absence of a Prime Minister heading into the December 20 budget limit could see the government rollover spending limits and tax provisions, likely failing to implement any cuts to the fiscal deficit. Because of this, we could see the CAC 40 take a tumble over the coming days if Barnier does not survive the vote of no confidence.