The CAC 40 index plunged sharply on Wednesday as concerns about the banking sector continued. The closely-watched index of blue-chip France companies plunged to a low of €6,870, the lowest point since January 11. After rising to a high of €7,395, it has fallen by ~7% in the past few days.
Banking risks remain
The CAC 40 index joined other European indices like the German DAX and Swiss SMI in a major sell-off. This decline was triggered by the elevated risks surrounding Credit Suisse, the second-biggest Swiss bank.
After the collapse of Silicon Valley Bank and Signature Bank, there were fears that the Swiss bank would be the next domino to fall. These risks seem to be behind us now that the Swiss National Bank has provided a lifeline for the bank. The central bank will give it access to over $50 billion.
This bailout explains why CAC 40 futures rose slightly on Thursday morning. In all, investors now believe that banks are generally safe because of their access to central bank liquidity.
France stocks will next focus on the upcoming European Central Bank (ECB), which I wrote about here. This will be an important decision because of the state of the market. In fact, analysts believe that the ECB has more work to do than the Federal Reserve, which will meet next week. For one, European inflation remains at a higher level than that in the US.
The ECB has hinted that it will hike interest rates by 0.50% in this meeting. However, because of the state of the financial market, there is a likelihood that the bank will hike rates by 0.25%. That will signal that it is still focused on fighting inflation while also preventing a bigger fallout in the banking sector.
The key CAC 40 index constituents to watch will be Societe Generale and BNB Paribas. The two stocks dropped by 12% and 10%, respectively.
CAC 40 index forecast
The 4H chart shows that the CAC 40 index topped at €7,402 last week. Now, it has managed to drop below the important support level at €7,172, the lowest level on March 2. The histogram of the MACD indicator has moved below the neutral level. The same is true with the MACD and signal line.
Similarly, the Relative Strength Index (RSI) has moved to the oversold level. Therefore, the CAC index will likely continue falling as sellers target the next key support at €6,600.