Financial markets work at their own pace: it's not just a nice phrase; it's a reality. For example, over the past two years, there have been many reasons for a market crash, but optimism has persisted.
And it still holds to this day, despite pundits claiming that
the S&P 500 is "overbought." The situation in Europe is quite similar: despite the challenges, the DAX has set an all-time high again.
As to why market behavior should be different, the fundamental picture could be more promising. In Germany, for example, consumer confidence is undermined by the offshoring of production abroad.
Since 2019, the country has lost around 20% of its industrial growth potential due to poor strategic decisions, such as the closure of nuclear power plants and over-reliance on export-led growth.
Meanwhile, in France, the issues are not so much economic, although there are problems such as a massive budget deficit, but rather one of political instability, which could even be considered a crisis.
The French government is facing a motion of censure, which could happen as early as Wednesday. Potentially, Barnier's government could fall by the end of the week.
As a result, the risk premium on French government bonds has reached a 12-year high. However, the
EURUSD currency pair, like the market in general, does not yet seem to be considering these negative developments too much.
The French CAC 40 index has only fallen by 1.8% in the last month, clearly undervalued compared to the DAX, which has risen by more than 3.8%. Even so, there are no signs of panic. The problems do not end there.
The EU is once again facing the threat of an energy crisis after the US imposed sanctions on Gazprombank, making it difficult, if not impossible, to purchase gas from Russia, which remains one of its key suppliers.
As expected, natural gas futures in Europe have soared. Unless a solution to the crisis is found before December 20, the price escalation may continue, posing a risk to households and businesses.
The cold winter forecast further complicates the situation, which will drive up gas consumption. In short, another perfect storm brewing could hit the EU economy hard.
To make matters worse, the bloc is still grappling with geopolitical crises within its borders, and now
Trump is threatening new tariffs. However, despite all this, markets don't seem too worried.
As to why there is so much indifference, it is likely due to the general "risk-on" sentiment. In other words, if a correction begins in the US, European markets will likely follow suit.
This article was written by FL Contributors at
www.forexlive.com.
