- At range highs with a high probability of a technical break out. Tends to range trade for a year before breaking out
- High exposure to the US and Financials sector. Read across from the strong US Bank results supportive of further upside.
- 6M upside volatility attractive to play the upside. 6M 110% Vol at 1YPc10, 3YPc8
The latest slightly cooler US CPI print has adjusted market expectations of rate cuts by the FED, with the 10Y across both the EU and the US repricing lower together with the weakening of the DXY. The market was only pricing in one rate cut for 2025 due to a very hot jobs print, with the first fully priced rate cut only expected in September but is now pricing in roughly 41bp of rate cuts by the end of the year. While the broader Eurozone rate cut expectations have remained broadly unchanged at 100bp of cuts in 2025, UK rate cut expectations also increased on the back of a cooler CPI print during the week, from 40bps of cuts priced in for 2025 at the beginning of the week to 60bps. The significant rise in yields and the dollar since November have effectively served as a tightening of financial conditions, which impact growth with a 2-3-month lag, thus paving the way for higher rate cut expectations down the line, supporting risk-on environment, as evidenced by the broader equity universe rebound over the last week.
Within Europe, the DAX which continues its advance to all-time highs, is perceived as the index most correlated to the US cyclical driven performance (25-30% revenue exposed to the US) due to its disproportionate exposure to the Autos and Industrials sectors, posting a +24% 1YR return, matching the SP500 performance and significantly outperforming the broader European region (1YR – FTSE MIB +18%, CAC +3%, IBEX +19%, FTSE 100 +11%). We believe the FTSE 100 could benefit from a further advancement of the main US equity indices, as it also has a high proportion of revenues exposed to the US, estimated at between 30-40%. In addition, the FTSE 100 is highly exposed to the financial sector (24% UKX, 17% DAX) and given the latest very strong results from the US Banking sector, should the broader European banking earnings season come out strong, this could lead to further upside in the index.
In terms of valuation, the FTSE still remains one of the cheapest of the European regional indices, with a PE of 11.5x, at a 4% discount vs. its 5Y average, also reflecting a deep discount to analysts’ target prices (15% upside). Looking at historical price trends, the FTSE appears to lag moves in the European indices and although history does not always repeat, it tends to remain rangebound for roughly a year, with several tests of the range highs before breaking through to the upside, rhyming with the current spot at range highs. Volatility is currently very cheap with 6M upside vol (110%) at 1YPc10 and 3YPc8 making it attractive to add delta on a potential range break out. We propose long FTSE 100 Jun25 8900 calls at 0.45% of underlying. (Spot ref 8392, Fut ref. 8397).