How Hedging Rises for European Stocks Getting Used to Terror

  • Options traders on Tuesday bet VStoxx will jump 36% by July
  • History shows markets recover fast after terror attacks

The rapid rebound in Europe’s equity markets after bombings in Brussels Tuesday may be a function of how much turbulence is already priced into the region’s shares.

Shares tracked by the Euro Stoxx 50 Index tumbled 1.7 percent after Belgium’s worst terror incident ever left at least 31 dead, then recouped the losses before the close. The resilience followed a period of frantic hedging in European shares that on Monday pushed the the number of bearish options on the gauge to a six-month high relative to bullish contracts.

For better or worse, European traders have been making preparations for catastrophe all year -- though mostly of the economic variety. 2016 is already the most volatile year for the region’s equities since 2008, with investors fretting about everything from corporate profits to oil and central-bank policy.

“Fund managers are certainly cautious on Europe,” said Patrick Spencer, equities vice chairman at Robert W. Baird & Co. in London. “Their caution is more about earnings and top-line growth than it is about terrorism. Capitalism is too strong a force to be kept back by terrorist attacks.”

There was evidence of additional hedging Tuesday. Investors traded four blocks of 2,000 contracts betting the VStoxx Index, which tracks expectations for the region’s equity volatility, will climb at least 36 percent by July.

Even before the attacks, the Euro Stoxx 50 was already posting its wildest swings since 2008, moving an average 1.4 percent each day this year. After climbing as much as 15 percent from a February low, the rebound has failed to hold, and the majority of the most-owned options on the index are bearish. The gauge rose 0.5 percent at 8:53 a.m. in London.

While terror has been on the minds of European traders since 130 people were murdered in Paris on Nov. 13, it’s far from the only thing driving market turbulence. The region’s shares fell as much as 18 percent to start the year as worries about banks, oil, China’s economy and U.S. rate policy sent stocks to a 31-month low on Feb. 11.

Strategists have slashed expectations for European equities, painting the gloomiest annual outlook in five years. At least 10 of 12 strategists surveyed by Bloomberg have lowered their 2016 forecast since December, cutting the average year-end projection for the Euro Stoxx 50 to 3,301 from 3,646.

Tuesday’s quick recovery shows traders are increasingly inured to isolated violence. Terror incidents tend to have little long-term impact on the market, says Peter Dixon, an economist at Commerzbank AG in London.

“For any investor who’s on the fence on whether to put their money in Europe, maybe this will cause them to hold off one or two days,” Dixon said. “But in the end, the focus goes back to, will I make money buying these equities? The attacks don’t change any of the fundamentals to answer that question.”

Here is a summary of how past attacks have affected the local and broader markets. In each instance, they recovered in days or weeks.

March 22, 2016: Brussels
* Belgium’s benchmark Bel20 Index fell as much as 1.4 percent before closing up 0.2 percent. The Euro Stoxx 50 and MSCI All-Country World Index also ended little changed.
* Britain’s pound weakened the most among its major peers on speculation the Belgian bombings will boost the case of campaigners who want Britain to quit the European Union.

Nov. 13, 2015: Paris
* When the market reopened on Nov. 16, the CAC 40 Index fell as much as 1.2 percent before ending the day little changed. The Euro Stoxx 50 also recovered from its loss, and the MSCI global equity gauge rose.
* The euro approached a seven-month low against the dollar.

March 29, 2010: Moscow
* Russia’s Micex Index slipped 0.3 percent before closing 1.7 percent higher as oil rose.
* Shares worldwide advanced.

Nov. 26, 2008: Mumbai
* The stock market remained shut on Nov. 27. The following day, the S&P BSE Sensex Index fell 1.5 percent, then erased its drop to climb 0.7 percent.
* Global equities rose on Nov. 26, 27 and 28.

July 7, 2005: London
* The FTSE 100 Index dropped as much as 4 percent before paring the loss to 1.4 percent by the end of the day. The Euro Stoxx 50 and MSCI gauge of shares worldwide fell.
* The pound weakened, while 10-year gilts advanced.

March 11, 2004: Madrid
* Spain’s IBEX 35 Index slid 3.1 percent before ending the day 2.2 percent lower. Both the Euro Stoxx 50 and MSCI measure dropped more than 1.5 percent.
* Gold gained with 10-year Treasuries.

Oct. 12, 2002: Bali
* Indonesia’s Jakarta Composite Index slumped 10 percent when the market reopened after the Saturday bombings, while shares in the broader region rose.
* The rupiah fell against the dollar.

Sept. 11, 2001: New York
* The U.S. stock market remained shut for four days. The week it reopened, the Standard & Poor’s 500 Index plunged 12 percent, the most since the October 1987 crash. Global equities tumbled a record 9.3 percent.
* The dollar had its biggest slump since 1998 when it resumed trading on Sept. 17.
* 10-year Treasuries, which were halted for only one day, climbed for two days.

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