Europe Stock Volatility Bets Unravel After Italian Vote Outcome

Italian Referendum and Political Risks in Markets

Traders who had pushed up the cost of hedging against swings in European stocks to a four-year high are unwinding their bets as Italy’s referendum result dispels some of the uncertainties gripping the region.

Euro-area equities climbed on Monday, while a gauge measuring volatility expectations for the asset class tumbled the most in a month, in keeping with a trend that has seen markets pricing in outcomes of political events faster each time. While U.K. stocks took three days to begin a rebound following the shock Brexit vote, global equity markets retraced almost all their losses intraday after Donald Trump’s unexpected U.S. election.

  • The VStoxx fell 13 percent at 11:44 a.m. in London after Italy’s ‘no’ vote prompted Prime Minister Matteo Renzi to resign. The gauge last week surged to its highest level since 2012 relative to actual Euro Stoxx 50 Index moves.
  • “Markets have learned a lesson, and they can be more relaxed,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. “Mr. Draghi already said last week that the ECB is in the position to buy more Italian government bonds if necessary.”
  • The European Central Bank’s meeting later this week and a likely Federal Reserve interest-rate increase this month will be in focus, followed by a busy political calendar in Europe next year.
  • The VStoxx index calculated using Euro Stoxx 50 options prices climbed in the last two weeks, while realized volatility for the equity measure fell to its lowest since the summer of 2014.
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