Europe Traders Look for Cover on Surprise Call for French Vote

(Bloomberg) -- Forget about a summer swoon in European options.

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After French President Emmanuel Macron shocked markets by calling for a snap vote following a surprisingly strong performance by right-wing political parties in European elections, the region’s equity options are implying a level of stress relative to the US usually seen around geopolitical conflict or broad financial upheavals.

The Euro Stoxx 50 Volatility Index, or VStoxx, rose 6.6 points last week, the biggest jump in more than two years. While the absolute level is still relatively low, the ratio to its US counterpart, the VIX index, has reached its highest since 2017. It’s also at a level similar to that seen during the sovereign debt crisis back in 2012, when soaring debt in the wake of the financial crisis and Greece’s struggles brought the euro area to the brink of collapse.

The risks around France’s election in early July have far outweighed the UK vote scheduled for July 4, roiling equity, bond and currency markets. France’s biggest companies account for about 40% of the Euro Stoxx 50 Index, giving the country a broad influence among general investors.

“The unexpected legislative election in France called at short notice by President Macron in the immediate aftermath of the European election creates considerable uncertainty,” wrote Citigroup Inc. strategist Aman Bansal. He notes that the nation’s equities tend to be more volatile than peers around key ballots, though swings are higher around presidential votes than parliamentary elections.

Government bond spreads are now widening and French stocks came under pressure last week with their first 2% drop in a single day in almost a year. Three-month implied volatility on France’s benchmark CAC 40 Index jumped to the highest level since October, while stocks on banks and other cyclical sectors were the biggest losers.

Currency options show traders are more concerned about the French election than the British vote Prime Minister Rishi Sunak called last month. One-month euro-pound implied volatility was little changed when it covered the UK risk for the first time, only to rally to the highest in 15 months after Macron called for the snap vote.

The heightened political uncertainty in Europe is piling pressure on the euro. While spot price action is relatively contained, traders added bearish options exposure to the European currency against the dollar at one of the fastest paces on record.

Hedging against a drop in euro-pound over the next month comes at the highest cost since October 2019, while the premium to own bullish bets on the Swiss franc has widened to levels last seen in August 2022.

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