U.S. Stock Volatility Topping Europe's May Be the New Normal

(Bloomberg) -- What was once little more than a short-term anomaly in equity derivative markets is quickly becoming a regular feature.

The VIX -- a measure of short-dated bets on U.S. equity volatility -- surged above its European equivalent in mid-October and has stayed above it on most days since -- an occurrence that before this year almost never lasted more than a day. It shows a rising expectation that the American benchmark will see larger swings than its euro-zone counterpart.

U.S. Stock Volatility Topping Europe's May Be the New Normal

It’s hard to tell whether this is now the new normal. Europe’s VStoxx has typically been higher than the VIX since the region’s stocks -- made up of multiple countries instead of one -- are indeed more volatile. But with the U.S. business cycle maturing and interest-rates rising, it makes sense for the country’s equity volatility to overtake Europe, according to Edmund Shing, global head of equity and derivative strategy at BNP Paribas SA in London.

“There’s still a bit more slack in the European cycle compared to the U.S. cycle, where there seems to be no slack,” Shing said by phone. “If anyone’s going to go to recession, it’s going to be the U.S., with the Fed already raising rates.”

Even in terms of longer-dated options, the S&P 500’s one-year implied volatility has also jumped above the Euro Stoxx 50’s.

U.S. Stock Volatility Topping Europe's May Be the New Normal

Since U.S. stocks peaked in late September, they’ve slid nearly 10 percent amid concerns over decelerating earnings growth and rising rates, compared with 7.7 percent for euro-zone shares. The Euro Stoxx 50’s 90-day historical volatility also fell below the S&P 500’s for the first time since 2011 this year.

There are some technical reasons for the VStoxx to be lower too. Structured product issuers hedge their exposure to European stocks by selling volatility.

But it’s not like European equities have little to worry about. Italy remains in a standoff with the European Union over the country’s aggressive budget. European Central Bank President Mario Draghi is set to step down in November 2019, just as the monetary authority plans to raise rates from record lows.

“The Italian situation is here to stay,” said Davide Silvestrini, head of European equity derivatives strategy at JPMorgan Chase & Co. in London. “Once people start thinking of what will come after Draghi -- that also could be a catalyst for volatility in Europe.”

The U.S. bank recommends variance-swap trade that would pay off if realized volatility for the Euro Stoxx 50 Index rises above that for the S&P 500 Index by December 2019.

©2018 Bloomberg L.P.