Greece Makes It Expensive to Hedge European Stocks

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Investors Getting Nervous Over Greek Debt Talks

While U.S. stock traders breathed a sigh of relief after Friday’s selloff, their counterparts in Europe are still on edge as drama unfolds in Greece.

A gauge of anxiety in Euro Stoxx 50 options jumped to the highest level in more than 12 years relative to a similar volatility measure in U.S. equity derivatives. The divergence reflects rising costs for hedges to protect gains in Europe even as its benchmark equity gauge sits about the same distance from a record as the Standard & Poor’s 500 Index.

Concern is growing among traders who see the deadlock between Greece and its creditors threatening European equities’ fourth straight month of gains. Investors piled into European stock options late last week on speculation the region’s rally will prove tenuous as time ticks away with no negotiations.

“The danger to the markets is that Greece says we’ve had enough, we’re going to jump out of the euro, or default on our debt, or both,” Randy Frederick, managing director of trading and derivatives at Charles Schwab Corp., said by phone. “Clearly the concern is that the impact of that could be much greater in Europe.”

Debt Negotiations

The VStoxx Index, a measure of expected volatility for European shares, soared 43 percent to 25.06 last week. The Chicago Board Options Exchange Volatility Index, derived from S&P 500 hedging costs, climbed 10 percent in that same period to 13.89. The European volatility index closed 1.8 times above its U.S. counterpart on Friday, the highest ratio since December 2002.

Prices of portfolio protection in Europe are near the most costly since February just three days before a meeting between Greece and the European Union.

In a sign of the severity of the crisis, Greece yesterday issued a decree that forces local governments to transfer cash balances to the central bank. European leaders want Greece to do more to revamp its debt-burdened economy, with progress to be reviewed on April 24 in Riga, when finance ministers from the currency bloc meet.

European Central Bank Vice President Vitor Constancio said it is “essential” that the Greek government reach agreement with its partners. Investors could be purchasing Euro Stoxx hedges ahead of this meeting, convinced decisions made then have the potential to roil overseas markets, Credit Suisse Group AG derivatives strategists led by Mandy Xu wrote in a note yesterday.

Less Concerned

Traders in U.S. stocks aren’t as bothered by Greece’s troubles as the S&P 500 hovers 0.8 percent from a March high, said Belmont Capital Group’s Stephen Solaka. Domestic stocks have endured turmoil in Russia and Greece previously, en route to 200 percent gains in the current bull market.

“U.S. markets aren’t as concerned as European markets and European markets have been moving a lot more,” Solaka, managing partner of Belmont Capital in Los Angeles, which oversees about $250 million in assets, said by phone. “A lot of these macro issues have been previously shrugged off.”

To Bruce McCain at Key Private Bank, Greece isn’t the main concern in European investors’ minds. Instead, they’re more focused on if a new stimulus program from the ECB can succeed in aiding the region’s economic recovery and pushing inflation higher.

Stimulus Questions

“The big question is just how effective their quantitative stimulus can be and whether their currencies will settle down enough,” said McCain, who helps oversee more than $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “Most investors have sort of reconciled to the idea that Greece may ultimately leave the euro-zone and it’s not going to implode.”

More may be at risk for investors in equities if Greece defaults on its debt or decides to exit the EU, according to Michael Purves at Weeden & Co. European equities have performed better than U.S. ones, with the Stoxx Europe 600’s 19 percent rally this year trouncing a 2 percent rally in the U.S. benchmark equity gauge.

Stoxx 600 shares have recently been more volatile, swinging an average of 0.73 percent each day, compared to 0.55 percent daily fluctuations in the S&P 500, according to data compiled by Bloomberg over the past 20 days.

The VIX slid 0.4 percent to 13.25 at 4 p.m. in New York as the S&P 500 lost 0.2 percent. The VStoxx rose 0.4 percent to 22.4, 1.7 times the level of the VIX, as the Stoxx 600 climbed 0.6 percent.

“You have people abruptly taking profits,” Purves, the Greenwich, Connecticut-based chief global strategist and head of equity derivatives research at Weeden, said by phone. “People are getting tired of the trade. They’re getting ready to push the exit button.”

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