CAC Gains Ground Despite Dovish ECB Statement

The CAC index has posted considerable gains in the Thursday session, continuing the upward movement which we saw on Wednesday. Currently, the index is at 5,136.50, up 0.69% on the day. On the release front, France’s trade deficit widened to EUR 6.0 billion, much higher than the estimate of EUR 4.5 billion. Eurozone Revised GDP rose 0.6% in the second quarter, matching the estimate.  The ECB held interest rates at 0.00%, and the rate statement indicated that the ECB would maintain its asset purchases program. On Friday, France releases the Government Budget Balance and Industrial Production.

The ECB rate statement was more dovish than expected, surprising many analysts. The ECB said that it was maintaining its quantitative easing program to December, adding that it could increase purchases if necessary. The statement said that if the economic outlook became “less favourable”, the bank was prepared to increase QE in terms of size or duration. Given that the eurozone economy has rebounded in 2017, there were expectations that the ECB would take a more hawkish stance and hint at a tapering of QE in early 2018. The ECB has yet to decide what to do next, and analysts do not expect the details of the new program to be announced until October or possibly December. ECB policymakers must weigh competing interests – Germany would like nothing more than the ECB to simply exit the program, which was brought in as an emergency measure to begin with. However, France and other eurozone members, which are not enjoying German-style growth, favor a gradual tapering of the program, perhaps lowering monthly asset purchases from EUR 60 billion to EUR 45 billion.  The markets will be monitoring ECB President Mario Draghi’s follow-up press conference, looking for some details about its plans for the QE program.

Britain’s departure from the European Union promises to have a significant impact on the Eurozone financial sector, and stock markets will also be affected. One issue under discussion relates to clearing houses based in Britain, specifically over euro-denominated trades. The European Commission is working on a draft law that would see joint supervision between the EU and Britain over such transactions, but France wants the European Securities and Markets Authority (ESMA) to have greater authority, such as a veto, over these transactions. This is one more example of the immense difficulty in untangling the British financial sector from the continent, and there will likely be intense wrangling between the two sides at the Brexit negotiations, as Britain tries to minimize the damage to London, which is set to lose its status as the premier financial hub in Europe.

Economic Calendar

Thursday (September 7)

• 2:45 French Trade Balance. Estimate -4.5B. Actual -6.0B
• 5:00 Eurozone Revised GDP. Estimate 0.6%. Actual 0.6%
• 5:02 French 10-y Bond Auction. Actual 0.67%
• 7:45 ECB Minimum Bid Rate. Estimate 0.00%
• 8:30 ECB Press Conference

Friday (September 8)

• 2:45 French Government Budget Balance
• 2:45 French Industrial Production. Estimate 0.5%

*All release times are EDT

*Key events are in bold

CAC, Thursday, September 7 at 8:30 EDT

Open: 5118.50 High: 5149.50 Low: 5103.30 Close: 5136.50

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