European indices

The continent is not one market 

The European index contracts share a time zone, a central bank for most of them and a great deal of cross border revenue, and they are still not substitutes for one another. Each national benchmark holds a short list of very large companies, and in most European markets that list is dominated by a small number of sectors. The result is that a national index is often better described by its sector mix than by its country: a change in bank funding costs reaches one contract hard and another barely at all, and the border between them explains almost none of it.

The contracts the ledger carries are Germany 40, UK 100, France 40, Euro 50, Spain 35, Italy 40, Netherlands 25, Switzerland 20, Sweden 30 and Poland 20. The first four are the liquid core of the class. The rest are national markets with more concentrated constituent lists and correspondingly more idiosyncratic behaviour.

Germany 40, and the construction that sets it apart 

The German benchmark holds the largest listed companies in the country and is weighted by free float adjusted capitalisation. Its constituent list leans heavily toward industrial manufacturing, automotive, chemicals, software and reinsurance, which makes it one of the most direct equity expressions of global goods demand available anywhere in Europe. Export exposure is the single most useful fact about it: a slowdown in global manufacturing, or a change in the terms on which Germany trades with the rest of the world, reaches this contract early.

It also carries a construction feature that is unusual among headline benchmarks and that is misread constantly. The German flagship is published as a performance index, meaning it is a total return series: dividends paid by constituents are treated as reinvested and included in the level, rather than being excluded as they are in the price return series that almost every other headline index uses.

Two consequences follow. First, a long run comparison of this index against a price return index elsewhere is not like for like, and the accumulated dividends account for a substantial part of the difference. Second, the mechanical ex dividend decline that a price return index records when a constituent distributes cash does not appear in this series at all, because the distribution is added back. Where a broker applies a dividend adjustment to an index CFD, the treatment differs accordingly, and the instrument's own contract specification is what states it.

UK 100, and its relationship with sterling 

The UK 100 contract references the large capitalisation benchmark of the London market, and its constituent list is unusual for a national index in that it is barely a national index at all. Its largest members are integrated energy companies, global mining groups, international banks, pharmaceutical manufacturers and consumer goods multinationals, and the majority of the revenue behind the index is earned outside the United Kingdom and denominated in other currencies, predominantly the dollar.

That produces the best known relationship in European index trading: the index and its own currency have often moved in opposite directions. When sterling weakens, foreign earnings translate into more sterling when reported, which supports the sterling denominated share prices of the companies earning them. The relationship is a translation effect rather than a law, it has weakened and strengthened over the years, and it fails completely when the news driving sterling is also bad for the underlying businesses. It is a mechanism to understand, not a rule to rely on.

The energy and mining weight has a second effect that is often mistaken for a domestic signal. A move in crude oil or in industrial metals reaches this index directly through its largest constituents, so the contract can move sharply on a commodity development that has nothing to do with the British economy.

France 40 and Euro 50 

The French benchmark is distinguished by a concentration found nowhere else in the class: luxury goods. Alongside the usual banks, energy and industrials sit several of the largest luxury and cosmetics groups in the world, and their revenue is disproportionately earned in Asia. Chinese consumer demand therefore reaches the French index far more directly than it reaches most other European contracts, which is a link that surprises readers who expect a national index to be about its own nation.

Euro 50 is not a national index. It is a cross border selection of the largest companies across the euro area, weighted by free float capitalisation, and it is the standard instrument for expressing a view on the currency bloc as a whole rather than on any one member of it. Its constituents overlap substantially with the German, French, Spanish, Italian and Dutch lists, which is precisely why it is the more diversified of the two choices and the less sensitive to any single national development.

The smaller national markets 

• Spain 35. Heavily weighted toward domestic banking, utilities and telecommunications, with substantial Latin American revenue behind several of its largest members. Emerging market currency movements reach it through that channel.
• Italy 40. The most bank dominated of the major European indices, which ties it closely to the yield on Italian government debt and to the spread between that yield and the German equivalent. Sovereign risk and bank equity are the same trade in this market more than in any other in the class.
• Netherlands 25. A short list containing several of the largest semiconductor equipment and technology companies in Europe, which makes it the closest European equivalent to a technology index and ties it to the global semiconductor cycle.
• Switzerland 20. Extremely concentrated in pharmaceuticals, consumer staples and financials, giving it a defensive profile relative to the rest of the class. It is denominated in a currency that itself behaves as a haven, so the index and the franc frequently respond to the same risk event in opposite ways.
• Sweden 30 and Poland 20. Smaller markets with narrower constituent lists, denominated in currencies outside the euro. Both are more sensitive to regional credit conditions and to their own central banks than the core contracts, and both are thinner, which shows up as wider quoted spreads and larger reactions to single constituent news.

Hours, and the shape of the European day 

The continental cash sessions run from nine in the morning to half past five in the afternoon central European time, and London runs from eight in the morning to half past four London time. During those hours the index level is computed from live constituent prices. Outside them the CFD continues to be quoted, derived from the related futures market, so a European index contract is open long after the shares underneath it have stopped trading.

Two features of the European day follow from the calendar rather than from the exchanges. The European afternoon overlaps the American cash open, and that overlap is when the largest share of European volume is transacted and when American data lands on European prices. And European cash markets close before the American session ends, so an American afternoon development reaches the European contracts through the derived overnight quote and is expressed in full only at the next European open, which is one of the ordinary sources of a gap in this class.

The currency layer under every European contract 

A European index is denominated in the currency of the market it covers, so a position produces a result in euros, sterling, francs, krona or zloty, and that result is converted into the account currency at the prevailing rate. For an account denominated in dollars or in a currency pegged to the dollar, this is a second exposure running alongside the index position itself, and it exists whether or not it is noticed.