Föhrenbergkreis Finanzwirtschaft

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Stock Markets in Europe Break Records for Calm and Quiet

Posted by hkarner - 2. Mai 2019

Date: 01-05-2019
Source: The Wall Street Journal

A leading European stock index has barely budged for 17 trading days in a row, breaking the previous streak set in 1993

In Europe, markets have hit their summer lull early—very early. As with markets in the U.S. and elsewhere, this very stability could be a dangerous thing for investors desperately hunting for returns.

One illustration of the quiet: The Stoxx Europe 600 index of leading European shares set a record for apparent investor apathy on Tuesday with the 17th consecutive trading session when its price has moved by less than 0.5%. The last longest streak of such little variation was 16 straight days ending in May 1993.

This is part of a broader, multicountry pattern in financial markets driven by the near uniform turnaround in the attitude of major central banks, led by the Federal Reserve, which is expected to retain its supportive policies toward investors and the economy in its policy statement Wednesday.

Central banks “seem to think their job at the moment is to suppress volatility to encourage risk-taking”, James Athey, senior investment manager at Aberdeen Standard Investments. He says there are few sellers in equities, government debt or corporate bonds. “Who’s going to take the other side of the trade because you’re fighting the Fed?”

But just as in previous periods of calm, investors who trade options are hunting for yield by selling insurance against future price moves, which is a great source of extra income so long as markets stay quiet. But it can become a source of painful losses when sentiment turns—as it did last December and before that in February 2018.

In December’s volatility shock, French bank BNP Paribas suffered losses big enough in its equity derivatives business to drag down its fourth-quarter results. And last February, an even bigger spike caused turmoil among exchange-traded funds that bet against a rise in volatility, leading Credit Suisse to liquidate its popular VelocityShares Daily Inverse VIX Short-Term Exchange Traded Note.

Sébastien Galy, senior macro strategist at Nordea Asset Management, says similar yield hunting can be seen in another big build up of investors selling market insurance against large scale price moves in several asset classes.

The effects of this in U.S. and European stocks can be seen in the extremely low levels of the volatility indexes and investment products tied to them. The VIX index, which measures expected volatility in the S&P 500 over the next 30 days is at its lowest level since early October, while the VDAX, a popular European alternative that measures volatility in Germany’s DAX index, is at its lowest since January 2018.

“Investors are betting on range trading, on nonevents, and the way to do this is generally to bet against volatility,” Mr. Galy said. “Everyone thinks this isn’t going to end well but then they keep doing it anyway.”

While volatility can come from prices moving up or down, very low expected volatility readings on the VIX tend to occur when stock markets keep edging steadily higher. For Europe, even though economic growth remains disappointing, fears of political flare-ups that dominated headlines at the beginning of 2019 have receded: From spendthrift policies in Italy to the instability of Britain dropping out of the EU with no agreement on how to settle future ties.

For Daniel Morris, senior investment strategist at BNP Paribas Asset Management, this is all the more reason to expect that this period won’t last. “There are always bumps in the road,” he said.

Mr. Morris is cautious because of the range of things that could cause throw markets off track in the coming months, such as fresh U.S. tariffs targeting European car makers or signs that stimulus measures in China won’t help growth among Europe’s exporters, especially Germany.

Others are more optimistic about Europe, despite the general trend for investors to keep pulling money from equity funds that has continued all year so far.

“It’s fashionable to hate European stocks but it’s now appearing that the EU isn’t in such a bad state after all, so it is a slow melt-up,” said Gregory Perdon, co-chief investment officer at private bankers Arbuthnot Latham .

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