CAC40, DAX Forecast: Two trades to watch

CAC steadies with French political concerns in focus

The CAC has steadied after two days of steep losses as the political crisis gripping France, the eurozone’s second-largest economy, came under the spotlight.

  French Prime Minister Francois Bayrou’s Minority government looks increasingly likely to collapse in early September when it faces a vote of no confidence. This comes after (September 8). Bayrou’s plan to reduce France’s public deficit from above 5% of GDP to below 3% by 2029, accompanied by sweeping cuts, has been met with widespread resistance across the political spectrum, plunging France deeper into political and financial instability.

If Bayrou loses the vote of no confidence, President Macron could appoint a new PM, likely from the centre left or keep Bayrou on in a caretaker role. On the other hand, Macron could call fresh elections, which could lead to higher bond yields. This risk is heightened by the persistent strength of populist parties in the polls. Here, there could be substantially less fiscal restraint, which could lead to a further credit rating downgrade for France.

The impact has been mainly seen in French assets. The CaC is down 3% so far this week, with banking stocks taking the largest hit. Meanwhile, the bond market is also reacting with French 10-year yields at the highest level since March. The gap between the French and the German 10-year yield widened to 79 basis points on Tuesday's largest spread since April.

While the CAC40 is edging higher today, the mood is likely to remain cautious towards French stocks as investors adopt a wait-and-see stance.

CAC40 forecast – technical analysis

CAC trades above its multi-month rising trendline, meaning the longer-term uptrend remains. The price faced rejection at 8000, rebounding lower, finding support on the multi-month rising trendline and the 200 SMA.

Sellers would need to take out these supports at 7660. A break below here opens the door to 7600 and 7500, the June low.

DAX falls for a third day as consumer sentiment drops, Nvidia earnings in focus

The DAX is falling for a third consecutive day as investors weigh weaker-than-expected German consumer confidence, while also looking ahead to Nvidia's earnings release after the US closing bell.

NVIDIA, the world's most valuable company, is set to release Q2 numbers after the US close. These will be watched carefully for cues on the AI trade. The AI trade showed some vulnerability earlier this month after a stellar run, prompting concerns that valuations were overextended and the AI trade had become overdone.

Given that Nvidia is the litmus test for the AI trade, its earnings have the potential to impact the broader tech sector and risk sentiment.

On the data front, German consumer confidence is expected to decline for the third consecutive month in September, as households become increasingly concerned about potential job losses and uncertainties surrounding inflation.

The GfK consumer confidence index declined to -23.6 in September from a downwardly revised 21.7. Growing concerns over job losses are causing consumers to remain cautious, particularly when it comes to major purchases. This further dampens hopes of a significant recovery in consumer sentiment this year.

The data follows German business sentiment data from yesterday, which rose to the highest level in more than a year. Data earlier this week also showed that the German economy shrank 0.3% in the second quarter as US tariffs slowed exports.

DAX forecast - technical analysis

The DAX trades within a familiar range, caught between 24,600 and 24,000, as it consolidates around the record high. The price continues to trade above its multi-month rising trendline; however, momentum is slowing, with the RSI tipping below 50.

Sellers will need to break below 24,000 to extend losses towards 23,380, the August low. A break below here brings 23,000 into focus.

Should the 24,000 support hold, buyers will look to rise towards 24,600 and fresh record highs.