U.S. INVESTORS WARY OF FRENCH ELECTIONS
CBOE Volatility Index hit a 5-month high of 16.28 points on Monday, indicating better demand for S&P 500 options hedges
NEW YORK two who advocate splitting France from the EU — clustered within five points of one another.
The top two finishers will advance to a runoff on May 7.
Conventional wisdom had for months held that yesterday’s results would produce a secondround showdown between centrist Emmanuel Macron and farright candidate Marine Le Pen, who wants to pull France from the EU.
Macron was seen winning that head-to-head handily, with the latest Elabe poll showing Le Pen losing ground.
However, neither is totally assured a spot in the May 7 runoff round as both conservative Francois Fillon and hard-left candidate Jean-Luc Melenchon, who also favours an EU withdrawal, were seen narrowing Macron and Le Pen’s lead over them.
Against the heightened possibility that yesterday’s outcome could weaken the economic bloc, some big investors are shying from European assets.
Dan Ivascyn, group chief investment officer at Pacific Management Co Inc is among them.
Pimco is underweight France, Italy, Spain and Portugal bonds as they “are vulnerable to success from anti-establishment candidates,” Ivascyn said.
The French election is just one of a spate of worries nagging investors in recent weeks.
US tensions with Syria and North Korea and doubts about President Donald Trump’s ability to deliver tax cuts and infrastructure spending to spur the US economy have also weighed.
In their safe-haven response, US investors have snapped up gold, yen and US and German government bonds.
The SPDR Gold Shares ETF is the No. 5 selling US-listed ETF this month, according to MorningStar Inc.
In fact, with gold hitting its highest price since early November last week, gold raked in US$755 million in the week ended last Wednesday, its biggest inflow in two months, according to Lipper data.
The iShares 20+ Year Treasury Bond ETF gathered US$75 million in the latest week, snapping three weeks of outflows.
Investors seem most anxious about a Le Pen and Melenchon runoff due to their anti-EU stance, putting either one to lead eurozone’s second biggest economy to possibly withdraw from the region’s economic bloc and common currency.
Those worries pushed up the hedging costs on potential swings in the euro against the dollar over the next 30 days to a 10-month high last week.
Meanwhile, the euro’s “put” bias over a one-month horizon traded at the lowest since July 2012, reflecting a view that the currency could decline.
The CBOE Volatility Index, the most widely followed gauge of US stock market investors’ anxiety, rallied to a five-month high of 16.28 on Monday, pointing to increased demand for S&P 500 Index options hedges.
Its counterpart for volatility in Europe and Asia is trading near its highest since the election of Trump.
Since mid-March, Matt Thompson co-head Of Volatility Group at Typhon Capital LLC, in Chicago, has been accumulating long VIX exposure via call options in the April-May timeframe.
The trade seeks to profit from an anticipated run-up in volatility ahead of the French election, said Thompson. Reuters