Greece, a country that accounts for less than 2 percent of the euro-area economy, is dominating investor sentiment to a degree not seen in four years.
Shares tracked by the Euro Stoxx 50 Index and Greek benchmark ASE Index are moving in unison by the most since July 2011, correlation data compiled by Bloomberg show. Europe’s equities jumped 5.8 percent in four days on optimism that Greek concessions would seal a bailout, then fell on Wednesday as creditors rejected the proposals.
“Greece is holding the market in chains,” said Teis Knuthsen, chief investment officer at Saxo Bank A/S’s private-banking unit in Hellerup, Denmark. “This would otherwise be a party for European stocks.”
The Greek impasse is holding back investors who may otherwise be weighing prospects for an economic revival and earnings growth. Instead, they are dealing with the most volatile stock market on record compared with the U.S.
The Euro Stoxx 50 fell as much as 1.3 percent on Wednesday after Greek Prime Minister Alexis Tsipras’s proposed measures failed to appease creditors, a step needed to win more financial aid. His government later rejected their counter-proposal, and Germany downplayed the chances of an imminent deal. Greece’s ASE closed down 1.8 percent, its first decline in five days.
The European gauge was little changed at 10:06 a.m. in London, while the Greek index slipped 0.7 percent.
Greece, whose companies make up less than 0.1 percent of the broader Stoxx Europe 600 Index, has been dictating stock moves in recent weeks.
The 30-day correlation between the Euro Stoxx 50 and the ASE has reached 0.7 from almost 0 in April. Back in 2011, the region’s sovereign-debt crisis was raging and the benchmark index for euro-area equities reached a two-year low in September. A correlation of 1 means both gauges move in lockstep.
Benno Galliker, a trader at Luzerner Kantonalbank AG, says he’s optimistic that an agreement will be reached. Greece’s bailout expires on June 30, which is also the deadline for about 1.5 billion euros ($1.7 billion) in payments to the International Monetary Fund.
“There could be some bumpy days ahead, but in the end I’m pretty sure we’ll find a solution,” said Galliker, a trader in Lucerne, Switzerland. “Nobody wants Greece out of the euro zone. How this solution will look like, it’s a different point.”
In the meantime, traders have increased hedging. The cost of bearish one-month options on the Euro Stoxx 50 has climbed 49 percent relative to bullish contracts since the index reached a four-month low last week. It’s at its highest level since February.
“European stocks are eager to leave the correction behind,” Saxo Bank’s Knuthsen said. “We just need to park Greece somewhere.”
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