​​How to trade the CAC 40 around Sunday’s French election result?

​​​How to trade the CAC 40 around Sunday’s French election result?

​Monday’s strong upward reaction of a 2.6% intraday relief rally in the French CAC 40 stock index following French first round legislative election results quickly gave way to a wave of selling. Despite that, the index gained over a percent in the course of the day.

​As can be seen on the daily candlestick chart, the price gap higher on the daily front month CAC 40 futures chart – when a futures contract trades above its previous trading day’s high – quickly gave way to the price gap being closed.

​The initial rally on Monday morning occurred as the centrist and left-wing parties announced they would drop their candidates in some constituencies so that other parties with ‘republican’ values can win these, effectively preventing the right-wing National Rally (NR) to gain an absolute majority at Sunday’s second round of elections.

​Monday morning’s political wrangling quickly led to a sell-off, though, as worries of either an absolute right-wing majority or a possible hung parliament worried investors. Legislative candidates have until 6pm CET to decide whether to stand for election or not.

​Potential issues with the French legislative election

​There are several potential issues, though, the first being that a party cannot force its candidates to step down and vacate a seat. Secondly, voters who have been told to vote for another party by the party they usually vote for in order to bloc the right-wing alliance from being elected might not want to do so, especially those from the centrist Together party when it comes to voting for the left-wing alliance New Popular Front (NPF).

​Tactical voting might thus not work as effectively as the incumbent and left-wing alliance hope and might still give the right-wing NR party a large majority of the, according to the polling institute Ipsos, estimate of between 285 to 315 potential three-way contests in the second round, assuming that no candidates withdraw.

​Were all candidates to tow the party line and not present themselves for election if asked to by their party, the number of three-way contests would likely drop to around 30 or 40, effectively preventing the right-wing RN party to gain an absolute majority.

​Having the right-wing RN govern with the centrist President Emmanuel Macron is one thing but a hung parliament with a squabbling centrist-green-left-wing alliance is another, both of which is not conducive to investors having faith in the French economy and stock market.

​CAC 40 comparison chart with European and US stock indices year-to-date performance

​Potential positive stock market impact after the French legislative election

​Investors may take three positives from the French election; the first being that once the election results are out, political upheaval tends to clear relatively quickly. French stock valuations are currently on the low side and investors might thus want to increase exposure to these again and history tells us that July is usually a month of rebound.

​Technical analysis of the CAC 40

​The French CAC 40, which is trading around flat year-to-date, is being supported by its September-to-July uptrend line at 7,493 and its 7,460 June low. The front month futures contract has spent the past four weeks above those support levels and remains medium-term bullish while these continue to hold. This support area also ties in with the April-to-July 2023 highs and may thus hold.

​CAC 40 weekly candlestick chart

​A fall through the 7,460 June low, however, would likely engage the January trough at 7,284.

​For a bullish reversal to occur, a rise and daily chart close above last and this week’s highs at 7,737.5-to-7,744 would need to be seen on a daily chart closing basis. Only then would a double bottom be formed on the daily chart.

​CAC 40 daily candlestick chart

​If indeed a daily chart close above last week’s high at 7,744 were to ensue, the May-to-July downtrend line at 7,832 and the mid-April low at 7,843 would be targeted, ahead of the 55-day simple moving average (SMA) at 7,927 and then the psychological 8,000 mark.