* European equity volatility picks up, esp relative to U.S.
* Equity markets so far largely sanguine on political risk
* VSTOXX term structure: reut.rs/2kFHnRi
* VSTOXX vs VIX: reut.rs/2lLlhgm
By Kit Rees
LONDON, Feb 14 A spike in expectations of
European equity market volatility around the first round of
France's presidential election suggests investors are belatedly
starting to worry about the outcome and potential price swings.
European equity markets, marching to the drumbeat of a
global rally, have remained relatively sanguine even as
uncertainties around the French election have jolted bond and
foreign exchange markets.
The term structure, which charts expected price swings using
options pricing for the most commonly used index for European
equity market volatility, the VSTOXX, shows a noticeable
steepening around April expiries, as this chart shows.
Moreover, the VSTOXX is also diverging from measures of U.S.
equity market volatility with the ratio of the price of
April futures on the two indices comparable to levels last seen
before the Brexit vote and the euro zone debt crisis, according
to Goldman Sachs.
This is partly explained by a spike in the cost of buying
puts relative to calls on Euro Stoxx 50 futures,
suggesting equity investors are increasingly looking for hedges
against a potential drop in European stocks.
French bond yields have risen sharply in recent weeks from a
low of 0.66 percent in early December on the possibility of a
victory for anti-euro far-right leader Marine Le Pen when two
rounds of voting begin in April.
French and European equity indices, however, have drifted
higher with investors focused on corporate earnings, a brighter
outlook for banks and a pick-up in regional economic growth.
The main French bluechip index is up nearly 13
percent over the past three months and is close to hitting its
highest since December 2015. Earnings expectations for French
bluechips have also ticked higher and are now positive for the
first time since the summer of 2015.
That optimism could be tested in coming months.
The latest Bank of America Merrill Lynch survey of European
fund manager shows sentiment towards French equities dropped to
its lowest level in almost two years and the CAC 40 was
the least-preferred equity index in Europe.
Expectations of volatility in European stock markets have
lagged currency markets, Goldman Sachs said, with the euro in
particularly choppy since the U.S. election as euro zone
political risks came to the fore.
While signs of volatility are appearing in equity markets
too, Goldman Sachs, said foreign exchange remains the best hedge
against political risks as were sterling during Brexit and the
Mexican peso during the U.S. election last year.
(Editing by Tom Heneghan)