Idea of the Day Dax vs FTSE 100

What: There has been an interesting divergence of late between the performance of the Dax and the FTSE 100. The two have diverged sharply in recent days, as you can see in the chart below, with the Dax surging ahead, while the FTSE 100 has been in the doldrums.

We believe that there are a couple of reasons for this, and that we may continue to see this outperformance by the German index vs. the UK index for the short to medium term.

• Firstly, we think that the outcome of the German election could be good news for the Dax, read our German election analysis here: https://goo.gl/hL4cgd
• Secondly, we believe that the recent decline in EUR/GBP and in the euro more broadly, is also Dax supportive at the expense of the FTSE 100.
• If Theresa May delivers a well-received speech on  Brexit on Friday, one that lays out the government’s plans for a transition deal, then her “soft” Brexit approach could be good news for the pound, weighing further on EUR/GBP. Since the Dax and the euro have a negative correlation, a weaker euro could see the DAX rise.
• Political risk: with the German elections out of the way from next week, and the UK still mired in Brexit negotiations, the political premium could swing towards the UK and weigh on the FTSE 100 relative to the Dax for the foreseeable future.

How: we expect the Dax to continue to outperform the FTSE 100 for the rest of this week, due to optimism surrounding the German election and a potential weaker FTSE 100 on the back of a stronger pound and rising Brexit risk ahead of May’s speech in Florence on Friday.