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Keith covered France via the etf EWQ in the Hedgeye Virtual Portfolio, managing immediate term TRADE risk (range) of the position. The CAC40 is now holding its TRADE support at 3,076. Intermediate term TREND resistance in the CAC40 is 3,271 (see chart below).

Trade Update: Covering France (EWQ) - 1. CAC heut

Despite the updated TRADE signals, we remain bearish on France over the intermediate term due to the continuing factors of:

  • Pending downgrade of France’s AAA Sovereign Credit rating
  • Public debt rising through the 90% (as a % of GDP)
  • Slowing growth (below the government’s 1% 2012 projection) and sticky inflation alongside Austerity’s Bite  = Stagflation
  • Banking risk, including any difficulties for its major banks (BNP, Credit Agricole, SocGen) to raise capital to the 9% Core Tier 1 ratio (see Unicredit for a preview!), and sovereign risk as France is the largest holder of Italian public debt and private debt, according to BIS
  • EFSF and IMF are undercapitalized to materially aid any potential sovereign and banking bailout needs of France
  • High unemployment rate of 9.8% (versus 7% in Germany); 22.8% among the French youth
  • Smaller export profile (versus Germany), so there’s less benefit to grow via exports 

Faux Pas

Today Sarkozy met with Merkel in Berlin to discuss among other issues, a financial transaction tax. Sarkozy got a light nod from Merkel in her comment, “Personally, I’m in favor of thinking about such a tax in the Eurozone”, yet there’s no indication the either the Eurozone (17) or the EU (27) will vote to follow suit. Sarkozy’s willingness to go-at-it-alone approach, particularly given the very public push-back from with the British under Cameron, is a false step in our opinion. Sarkozy’s positioning is surely connected to his re-election desires, however a financial transaction tax, especially in a go-at-it-alone-approach, is an anti-competitive move that would not only cost the French banking sector dearly, but the economy at large.

Matthew Hedrick

Senior Analyst