The Dow version of the French stock market index compressed yesterday and has fallen through the bottom of that daily-scale compression today. Belgium has done something similar and this weakness is merely France following some of the other Europeans downward in this anticipated slide. The French market may be doing something more important though. We have been pointing out for some weeks that it is more like the markets of Italy and Spain than is generally recognised, because the French economy cannot thrive in competition with Germany when locked together in the Euro - there is a gap of perhaps 30% between German and French competitiveness. Nonetheless, French assets have been priced like those of Germany, not those of Spain meaning that the market has not yet acknowledged this strange over-valuation.
Now that this compression has formed and broken down (at least so far today, an hour from the close) it seems probable that this is the beginning of the re-pricing that we have been expecting. If so, Germany will fall less than France at times like these and will rally more than France during upswings. France will probably also fall outright – i.e. it is a short-sale candidate as well as being the ‘sell’ half of the German/France pair trade.
Meanwhile US equities have yet to join in the increasing rout in Europe, so we would now start to tighten protective buy stops on outstanding shorts there – we will give it a few more days room before abandoning the trade but we are aware that the medium-term trend is up and that there has been every chance for the US to fall like many other equity markets have, and as energy markets also have. Don’t cover yet, but our signals have a fairly well-defined shelf life and this one is getting a bit stale. Stay short of those Nymex energy futures, except for Nat Gas where we expect further strength.