Idea of day FTSE 100 vs Dax

What: As we lead up to ‘super Thursday’: the UK election, the ECB meeting and former FBI director Comey’s testimony, we expect to see the German Dax index outperform the UK FTSE 100. The chief reason for this is that we expect the ECB to adjust its forward guidance at this week’s meeting and drop its reference to potential further cuts to the deposit rate. We believe that this will be seen as a sign of confidence in the Eurozone economy and could benefit German stocks and the banking sector in particular. In contrast, our base case for the UK election result is that the Conservatives win with a small majority, very similar to the current political situation. We believe that this could disappoint financial markets and may weigh on the FTSE at the end of this week.

How: We have noticed that since mid-March the FTSE 100 has underperformed the Dax index (see figure 1). While the major global indices have continued to climb higher, the Dax is climbing at a faster pace than the FTSE 100. Interestingly, we have seen the FTSE 250 index and the mid-cap Dax index diverge sharply in recent sessions (see figure 2), as the mid-cap UK index has started to suffer from investor nerves in the lead up to the UK election. This could be a lead indicator and we may see the larger indices suffer the same fate in the latter part of this week. We believe that if we see a virtual unchanged election outcome for the UK and a shift in the ECB’s forward guidance then a relative value Dax vs. FTSE 100 trade, which is looking for further Dax outperformance, could be an interesting idea.

Key risk: Since the outcome of the UK election is extremely hard to predict due to the large disparity between opinion polls, the prospect of a win for the Conservatives with a large majority of say 40 seats or more, cannot be ruled out. If this happens then we would expect the FTSE 100 to outperform the DAX, at least in the short term.

Chart 1: FTSE 100 vs. Dax, this chart has been normalised to show how they move together. 

Source: City Index and Bloomberg

Source: City Index and Bloomberg