Zhitong Finance and Economics learned that the European blue-chip benchmark index - Euro Stoxx 50 (Euro Stoxx 50) is extremely strong, so much so that technical indicators show that the index is at the highest overbought level in more than 20 years. As Europe** extended its rally on Tuesday, the index has accumulated more than 14% since hitting a stage low in October. At the same time, the Relative Strength Index (RSI), a core measure of market momentum and health, has risen above 80 points, reaching the "overbought" zone, the highest level since late 1999, when the infamous dot-com bubble was peaking globally.
Fears of missing out** market rally, i.e. FOMO sentiment, remain the biggest driver of European markets," said Andreas Lipkow, strategist at Comdirect Bank. However, he said that market momentum has weakened over the past few sessions, suggesting that a fresh catalyst may be needed to continue chasing new records. In addition, rising expectations of the European Central Bank's interest rate cut in financial markets are also an important factor contributing to the bullish sentiment in Europe.
The ECB has raised interest rates ten times in a row since July 2022, raising the rate on major refinancing operations to a 22-year high of 45% to raise the deposit facility rate to a record level of 4%. The ECB is determined to ensure that inflation returns to its 2% target in the medium term and has said it will keep interest rates at such high levels long enough until this is achieved. Some parts of the ECB** have recently issued frequent statements saying that they will stick to tight monetary policy.
However, the recent sharp slowdown in consumer** growth has taken markets, and even some of the ECB's monetary policymakers, by surprise, prompting bets that the ECB will start a rate-cutting cycle as early as next spring.
Eurozone interest rates** markets are currently aggressively pricing in the possibility of five 25bp rate cuts by the ECB next year, with expectations for a sixth rate cut still hanging in the balance. Just a month ago, bets were on just three rate cuts. The market is now pricing in a 70% probability of the first rate cut in March, compared to a scenario that was barely considered not so long ago.
It is reported that Adyen NV, a European payment service provider, and Siemens, a German industrial giant, are the companies that have risen the most in the index. The situation is prevalent across Europe, with 15 of the 21 sectors now trading above 70 points. An RSI reading above 50 is generally considered bullish, and an reading above 70 is often considered the so-called "overbought" benchmark.
France's CAC 40 index is heading for new highs
In France, Europe's second-largest economy, the country's benchmark stock index is on track to surpass the all-time high set in April as of Tuesday**, with L'Oréal, Schneider Electric and Air Liquide being the top gainers. In Germany, Europe's largest economy, the DAX index, the benchmark index for German blue chips, is at its highest overbought level since 2017.
France's blue-chip benchmark index CAC 40 is on track to hit a new all-time high today. Rising expectations in financial markets that the ECB will cut interest rates next year prompted the share prices of cosmetics giant L'Oréal and industrial conglomerate Schneider Electric to soar at the end of the year.
As of press time, the Paris benchmark index, which is home to large multinational companies such as LVMH, Hermes and Sanofi SA, is 03% to 757750 points, surpassing the previous historical high set in April. Previously, both the German DAX and the Italian FTSE MIB had fully emerged from the summer correction trend**.
Luxury groups, including LVMH, L'Oreal and Hermes, account for more than a quarter of the CAC 40's 17% year-to-date gain. Global cosmetics giant L'Oréal (L'Oreal) was the company that boosted the index the most this year, with Schneider Electric and Air Liquide SA in second and third place, respectively, extending the overall rally to the long-** sector, rather than being boosted by luxury stocks as it did in April.
While the share prices of high-end luxury manufacturers retreated over the summer on concerns about a sluggish economic recovery in major markets such as the US, the sector has been tentative since October**. The industry is still growing strongly due to its wealthy customer base being less sensitive to economic downturns. Since mid-October, LVMH's share price has risen by 12%, Hermès by 18%, and even the share price of Gucci's parent company, Kering, which has been hit hard this year, has fallen by nearly 2%.
The largest driver of the CAC index – contributed to the overall rise in the French CAC 40 years to date
Amelie Derambure, senior multi-asset portfolio manager at Amundi in Paris, said: "I think the decline in benchmark Treasury yields, driven by the disinflationary trend, was the biggest driver of the new records in the Euro Stoxx 50 and the French CAC 40. She added: "It's an all-round ** that has boosted both Europe and the United States." She noted that most sectors, from industrials to retail, have benefited from extremely optimistic investor sentiment.
But Derambure believes that this rally won't last long without evidence of resilience in economic growth, "but in the short term, it's a period of pretty good returns." She added.
In terms of economic growth expectations, according to a new survey of economists conducted by the agency, the eurozone is likely to not escape the first recession since the pandemic, and the region's economy is expected to shrink for two consecutive quarters. Economists expect eurozone GDP to fall 0.0 percent in the fourth quarter, according to the latest survey data1%, which led to two consecutive quarters of quarter-on-quarter declines, falling into the so-called "technical recession".