Europe Stock Volatility Futures Are Still Trading in Panic Mode
(Bloomberg) -- Just like in the U.S., investors in Europe are still grappling with the sudden flare up in volatility -- and the nerves show no signs of abating.
Though the recent bout of turbulence began with intense focus on the U.S. Cboe Volatility Index, panic not only infected the VStoxx Index as well, but it’s created an unusual relationship that only appears during times of duress. The active Euro Stoxx 50 Index futures price and the spread between between the second- and first-month VStoxx contracts have been highly correlated since Feb. 5.
“Part of it is just that investors are more nervous, quicker to hedge their downside with put buying,” said Cathal Hardiman, an institutional trader at IMC Financial Markets in Amsterdam. “At the moment, a 1 percent drop in futures is more likely to lead to a bigger drop, so it brings about more vol buying.”
Like the VIX futures curve, the VStoxx curve is in backwardation, when investors price near-term contracts higher than those further out. Typically, longer-dated volatility futures command a loftier price because of the uncertainty tied to far-out future events. When there is an inversion, the spread between the first- and second-month contracts tends to track stock-index futures, according to Hardiman.
The spread between the first- and second-month VStoxx futures is wider than ahead of the French presidential election last year and was only wider during the European debt crisis and the aftermath of the Brexit vote.
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