Bank of Japan, Energy, Fed: Why the CAC 40 is Moving Cautiously

The Shock from Japan

The cautious start of the CAC 40 owes much to the unexpected statements from the Governor of the Bank of Japan, Kazuo Ueda. Overnight, he mentioned « good discussions » with Prime Minister Sanae Takaichi, an element investors immediately interpreted as political approval for a potential rate hike as early as December, with the markets now estimating an 80% probability. The stakes are high: until now, operators were more expecting the head of government to slow down monetary normalization, which remains a sensitive issue in a country accustomed to low rates for decades.

The reaction in Japanese markets was swift. The Nikkei 225 dropped 1.90%, in a sharp move fueled by the rapid rise in yields. The 10-year yield hit 1.89%, its highest level since 2008, while the 20-year reached 2.89%, a record since 1999. The yen strengthened, buoyed by the prospect of monetary tightening. This rise in tension immediately affected Europe, where bond yields edged up slightly at the open. The CAC 40 thus began the session on a cautious note, reflecting a market still sensitive to monetary policy signals, even when they come from Asia.

The geopolitical context adds a layer of uncertainty. European indices are moving under the influence of ongoing negotiations regarding the conflict in Ukraine. Since the beginning of these discussion phases, European stock markets have reacted positively, particularly supported by a relaxation in energy prices. European natural gas prices have fallen to €28/MWh, their lowest since May 2024. However, Russia's official stance on the latest peace proposals remains unclear, and investors remain vigilant in the face of a situation where every shift can move the markets.

A Crucial Week in the US

While Tokyo may have set the initial tone, it's the American agenda that will dominate the rest of the week. Two indicators will be closely monitored: the ISM Manufacturing and the ISM Services indexes, expected to provide the first concrete signs of the economic effects of the shutdown. Investors will particularly be looking to assess the impact on activity and growth expectations.

Labor market and inflation data will complete the picture. Unless there is a major surprise, these figures are not expected to challenge the scenario currently favored by the markets: another Fed rate cut in December. This scenario, which was still fragile a few days ago, has become solidly entrenched after statements made by the New York Fed President, John Williams. Prior to his remarks, the probability of a rate cut was only slightly above 30%. It has now surged to 88%, a dramatic increase that has immediately eased tension in the bond markets and supported U.S. and European stocks.

The combination of these factors—Japanese tensions, a relaxed energy market, geopolitical uncertainties, and a packed U.S. macro agenda—explains a start to the month where markets prefer caution over aggressive bets. The CAC 40 is not worried: it is cautious. This is an important distinction in an environment where every monetary or diplomatic move can become a trigger for volatility.