March 4 (Bloomberg) -- Not since Europe’s bull market began three years ago has volatility in its stock market risen as quickly as it did yesterday.
Most of that increase was reversed today as tensions between Ukraine and Russia receded. The VStoxx Index, based on the price of options protecting against Euro Stoxx 50 Index losses, tumbled 15 percent to 18.65 today. The volatility gauge jumped 30 percent yesterday, the biggest gain since the European debt crisis in August 2011.
“They have a nascent rally and there’s less certainty about the trajectory of their economic recovery,” Trevor Mottl, Susquehanna Financial Group LLLP’s New York-based head of derivatives strategy, said by phone. “Any increase in energy costs to Europe should have a negative impact.”
Traders bought insurance after Ukraine’s conflict with Russia raised concern energy supplies would be crimped and sent the Euro Stoxx 50 down 3 percent, the most in eight months. European stocks rebounded today as investors speculated that the military standoff will not lead to war.
Russian President Vladimir Putin said in his first public remarks since the ouster of former Ukraine President Viktor Yanukovych last month that he’d only send soldiers to Ukraine in an extreme case. Secretary of State John Kerry arrives today in Kiev as the U.S. and its European allies seek ways to increase economic and diplomatic pressure to deter Russian military escalation in Ukraine’s Crimea region.
The declines yesterday dented a rally that has restored about 1 trillion euros ($1.37 trillion) to the Euro Stoxx 50 since 2011 as investors speculated the region’s recovery is finally taking hold. The overall euro economy grew 0.3 percent sequentially in the final three months of 2013, expanding for the third consecutive quarter.
The Stoxx Europe 600 Index rose 2.1 percent today to 337.15, rebounding from the biggest loss in five weeks.
Kevin Lilley, head of European equities at Old Mutual Global Investors U.K. Ltd., said he’s been selling shares of companies with sales in Ukraine, while Oliver Wallin at Octopus Investments Ltd. said he is increasing his cash holdings.
“With the Ukraine, it’s destabilizing in the short-term,” Lilley, who helps manage $17 billion Old Mutual, said by phone from London yesterday. “You don’t know what the end outcome is.”
Russia, which provided 30 percent of Europe’s natural gas last year, sends half of its supplies via Ukraine. So far, shipments to Ukraine and the rest of Europe haven’t been disrupted. Europe also imports gas through pipelines from Norway, the region’s second-biggest supplier, as well as Algeria and Libya and as liquefied natural gas on board ships.
Benchmark indexes of nations with the biggest trading relationships with the Ukraine fell the most in yesterday’s selloff. The DAX Index slumped 3.4 percent to 9,358.89, the second-biggest drop out of 18 western-European markets and the biggest retreat since November 2011. All 30 members decreased.
Italy’s FTSE MIB Index slumped 3.3 percent to 19,759.69 for the third-largest decline in the region as all 40 stocks decreased.
Germany is the nation with the most at stake in Ukraine among western European countries, according to Bloomberg data. Trade between the two countries totaled $8.38 billion in 2012, while Italy had the second-most with $5.13 billion.
The standoff in Crimea is temporary and won’t affect the longer term advance in European stocks, according to Jiban Nath of Solo Capital Partners LLP in London.
“The market is showing people are looking at this as a short-term problem,” Nath, an equity-derivatives strategist at Solo Capital Partners, said yesterday. “A lot of this is profit taking, not panic selling and everyone running away. As long as European leaders don’t react poorly, I think market-wise at least, this will be OK.”
The euro-area’s economy will expand 1.1 percent this year and 1.5 percent in 2015 after shrinking 0.4 percent in 2013, according to forecasts compiled by Bloomberg.
Investors may be locking in gains amid increasing risks, according to Octopus Investments’ Wallin, who helps oversee $5.6 billion. The Stoxx Europe 600 Index has surged 54 percent from a low in September 2011 as expectations of a economic recovery in the region improved and European Central Bank President Mario Draghi pledged to do whatever it takes to safeguard the euro.
“We are waiting for the dust to settle,” Wallin, the investment director at Octopus Investments in London, said by phone. “The biggest risk to markets this year would be they got over-excited. This year, everybody came in with a consensus bullish view.”
On Feb. 25, the Stoxx 600 climbed to 338.39, the highest level in more than six years. The DAX climbed to a record 9,742.96 on Jan. 17, while the U.K.’s FTSE 100 Index reached 6,865.86 last month, the highest level since December 1999.
The VStoxx, calculated from the implied volatility on Euro Stoxx 50 options expiring over the next 30 days, has fallen 2 percent this year.
The Chicago Board Options Exchange Volatility Index lost 12 percent to 14.10 today, paring the 14 percent jump from yesterday.
Implied volatility for European equities has climbed to the highest level in six months compared with the S&P 500. With the VStoxx Index at 5.9 points above the VIX, it is the widest gap since September when U.S. lawmakers considered a military strike in Syria.
Among the 10 most-owned VStoxx contracts, seven were calls, according to data compiled by Bloomberg. Calls expiring in March with a strike level of 30 had the biggest open interest.
“We’re seeing more volatility in Europe than the U.S. because European markets have suffered more since the Ukraine crisis began,” Pierre Mouton, who helps manage $6 billion at Notz, Stucki & Cie. in Geneva, said yesterday. “The U.S. is better because it is more defensive, whereas European markets are more vulnerable to developments outside the region.”