France\u2019s HCOB Services PMI came in at 46.8 in June, undershooting expectations of 47.4. The reading remains below the 50 threshold that typically separates expansion from contraction, pointing to continued weakness in services activity.<\/p>\n
The latest results extend a run of sub-50 prints and suggest that demand conditions in the sector remain soft. Markets will compare the June figure with upcoming business surveys and hard data to assess whether the downturn is easing or becoming more entrenched.<\/p>\n
The unexpected drop in France’s services PMI to 46.8 confirms a contraction is taking hold. This reading, below the 47.4 forecast, suggests the economic slowdown in a core Eurozone nation is more severe than we anticipated. We are therefore adjusting our short-term outlook to be more defensive on European assets.<\/p>\n
We see increased downside risk for the CAC 40 index in the coming weeks. Historically, PMI misses of this magnitude, especially when the index is already below the 50-point contraction threshold, have often preceded a 2-3% drop in the following month. We are therefore buying August-expiry put options on the CAC 40 to hedge against or profit from a potential decline.<\/p>\n
This weakness in the Eurozone’s second-largest economy will likely put downward pressure on the Euro. With inflation in the Euro area having recently stabilized around 2.6%, data like this makes it harder for the European Central Bank to maintain a hawkish stance. We are therefore positioning for a weaker EUR\/USD, potentially re-testing support levels seen earlier this year.<\/p>\n
Economic uncertainty is rising, and we anticipate an increase in market volatility. The Euro Stoxx 50 Volatility Index (VSTOXX), currently trading near a relatively low 16, does not appear to fully price in this new risk from France. We are buying VSTOXX call options as a cost-effective way to protect our portfolio from a broader European market downturn.<\/p>\n\n\n\n