France’s private-sector activity fell in May, based on preliminary S&P Global data, as higher oil prices affected households and businesses. The French Composite PMI dropped to 43.5, the lowest since November 2020.
The result was below economists’ forecasts and April’s 47.6 reading. A level below 50 indicates contraction in activity across manufacturing and services.
French Activity Slumps On Oil Shock
Firms in factories and the services sector reported lower output linked to higher energy costs, connected to an oil shock from the Iran war. Private-sector new orders also fell in May.
Across the Eurozone, PMI data showed the wider economy also contracted in May, but less sharply than in France. The euro recovered during the release, while the move was linked to a pullback in the US dollar amid hopes of a United States–Iran deal.
At the time stated, EUR/USD rebounded to near 1.1630 from an intraday low of 1.1594.
The new French economic data is a clear warning sign for us, suggesting the oil shock from the Iran conflict is hitting harder than anticipated. A composite PMI of 43.5 indicates a steep economic contraction, pointing towards a heightened risk of recession in the Eurozone’s second-largest economy. The sharp drop in new private sector orders is particularly alarming, as it signals that this weakness is likely to continue.
Potential Trades And Risk Hedges
This poor economic outlook should make us consider short positions on French equities, specifically targeting the CAC 40 index. We could use put options to capitalize on a potential decline while managing our risk exposure. The ripple effect could also depress the broader Euro Stoxx 50, making it another target for bearish strategies in the coming weeks.
However, the market is currently driven by geopolitics rather than this weak fundamental data. The Euro is strengthening against the dollar not because of European economic health, but because of hopes for a US-Iran deal that would ease oil prices. This creates a difficult trading environment where good news on the diplomatic front can easily overshadow very bad economic news.
We saw a similar pattern when we looked back at the European energy crisis in 2022. During that period, the Euro Stoxx 50 index fell by nearly 20% in just a few months as soaring energy costs crushed economic activity. If hopes for the current Iran deal collapse, we should be prepared for a similarly rapid and severe sell-off in European assets.
Given these conflicting signals, the most reliable trade for us is on volatility itself. The VSTOXX, which tracks volatility on the Euro Stoxx 50, is likely to rise as markets swing between recession fears and geopolitical optimism. We should consider strategies like options straddles on EUR/USD, which would profit from a large price move in either direction.
