Traders have never paid so much to protect against European stock losses relative to the U.S. as investors prepare for weekend elections in France and Greece.
Implied volatility for three-month contracts closest to the level of the Euro Stoxx 50 Index was 54 percent higher yesterday than the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The gap widened from a 2012 low of 18 percent on March 13, the data show.
Investors are insuring equities on concern the elections will undermine plans to contain the debt crisis. French voters pick a president on May 6, the same day as Greece holds parliamentary elections. Francois Hollande, who topped Nicolas Sarkozy in the first round of French voting, has criticized the president’s attempt with German Chancellor Angela Merkel to quell the crisis through budget cuts. Economists say Europe’s economy is contracting, while U.S. data recover.
“There’s this growing contrast between the United States economically and the euro zone,” James Butterfill, who helps oversee about 40 billion pounds ($64.9 billion) as a global equity strategist at Coutts & Co. in London, said in a phone interview yesterday. The elections add “a lot of uncertainty,” he said. “If Hollande gets in power, then what will the relationship be like between Merkel and Hollande? It probably won’t be as cozy as it was between Sarkozy and Merkel.”
The Euro Stoxx 50, which tracks the performance of the biggest companies in European nations using the shared currency, has lost 0.4 percent this year. The S&P 500 is up 12 percent and on April 2 touched its highest level since May 2008. The benchmark measure for U.S. equities advanced 0.6 percent yesterday after manufacturing expanded at the fastest pace in almost a year.
The Euro Stoxx 50 surged 25 percent between Nov. 24 and March 19 as Sarkozy and Merkel helped lead European leaders to agree on a fiscal pact aimed at ending the debt crisis by enforcing budget discipline. The European Central Bank also provided emergency loans to banks.
The European stocks gauge fell 12 percent since its more than seven-month high on March 19 as yields on Spanish and Italian bonds jumped and investors paid record prices to insure against a Spanish default. The Stoxx 50 sank 2.9 percent to a four-month low and equity indexes for eight western European nations lost at least 2.5 percent on April 23 as the backlash against budget cuts gained momentum and Dutch Prime Minister Mark Rutte offered his cabinet’s resignation.
Ahead in Polls
French Socialist presidential candidate Hollande escalated criticism of Europe’s debt-crisis response this week, pushing back against Merkel’s focus on deficit reduction. Hollande has consistently been ahead in the polls before the second and final vote on May 6. He led 54 percent to 46 percent in an Ifop poll released yesterday.
In Greece, the last polls before a two-week ban on voter sentiment readings showed no party has a mandate to enforce the austerity policies the nation needs to stay in the euro zone.
“The elections are going to test the resolve of Europe to deal with their issues,” John Manley, the New York-based chief equity strategist for Wells Fargo Advantage Funds, said yesterday in a phone interview. His firm oversees $213 billion. “There’s going to be a lot of negotiating going back and forth, a lot of give and take.”
The uncertainty over European elections may lead investors to undervalue some European stocks, which will benefit from stronger global growth and a weak euro, according to George Godber at Charles Stanley & Co.’s Matterley division in London.
“It’s wrong to look at Europe in isolation because it is quite clearly not a single economic unit,” Godber, who helps oversee $160 million at Charles Stanley, said in a phone interview yesterday. “There are some exceptional multinational businesses listed in France, Spain, Italy,” he said. “The prospects for those companies do not reflect the underlying domestic economy at all.”
The DAX Index has surged 15 percent in 2012, and German stocks account for the five largest advances in the Euro Stoxx 50 this year.
Bayerische Motoren Werke AG of Munich rose the most, rallying 39 percent as the world’s largest maker of luxury vehicles set a first-quarter sales record amid gains in emerging markets. SAP AG of Walldorf, Germany, increased 23 percent. The biggest maker of business management software said a “very solid pipeline” of new deals will help meet growth targets as demand picks up for mobile programs and software to process large amounts of data.
The elections come as economists project that gross domestic product in the euro zone will contract 0.4 percent in 2012, according to the median estimate in a Bloomberg survey. The U.S. economy is forecast to grow 2.3 percent.
U.S. manufacturing unexpectedly expanded in April at the fastest pace in 10 months, according to the Institute for Supply Management’s factory index yesterday. Unemployment in the 17-nation euro area rose to a 15-year year high and manufacturing in the region contracted for a ninth month, adding to signs the economic slump is deepening.
Implied volatility for the Euro Stoxx 50 rose 29 percent since its March 13 low for the year to 23.98 yesterday, according to data on three-month options compiled by Bloomberg. Bets on future price swings in the S&P 500 fell 3 percent during the same period to 15.2 yesterday.
The VStoxx Index, the European gauge that’s comparable to the Chicago Board Options Exchange Volatility Index, reached its highest level since May 2003 on April 26 relative to the U.S. index known as the VIX, the data show. The VStoxx rose 3.9 percent to 28.01 today, as the VIX added 1.7 percent to 16.88.
Since April 23, Euro Stoxx 50 July 2,200 puts, which are priced 4.6 percent below the index’s closing level yesterday, had the biggest increase in ownership among all bearish contracts, followed by December 2,300 puts, data compiled by Bloomberg show. December 2,000 puts and December 2,100 puts had the biggest open interest among all of the index’s options.
“Nobody knows what’s going to happen,” Simon Gleadall, chief executive officer of Volcube Ltd., an options education, research and technology company in London, said in a phone interview yesterday. “There’s so much uncertainty, and the uncertainty is so much higher in Europe than it is in the U.S. There’s a fear that something terrible might happen.”