French Election Fear Soars: Equity, Credit, FX Hedges Panic Bid

With little more than two weeks to go before the first round of French elections, expectations for sizable fluctuations in European markets are growing.

As Bloomberg reports, the VStoxx Index, which measures volatility bets based on options on the Euro Stoxx 50 Index, has rebounded from suppressed levels and is heading for a third consecutive weekly advance.

That’s its longest rising streak since before the U.K. referendum on European Union membership last year.

Furthermore, as the French election looms, investors are increasing bets on the nation’s stock-benchmark gauge. The number of options on the CAC 40 Index has surged to its highest level since 2011, while remaining stable on the regional Euro Stoxx 50 Index.

Since last month’s expiration, call open interest rose 26 percent, outpacing the 22 percent increase in puts outstanding.

But it's not just equity markets that are anxious, FX markets are in freakout mode as traders panic bid hedges. As Bloomberg details, pessimism on the euro has jumped to the highest level since the Brexit referendum as investors hedge the risk of Marine Le Pen becoming France’s president, even as polls suggest the far-right politician will lose the second round of voting on May 7 to independent candidate Emmanuel Macron.

The cost of one-month options to buy the common currency against the yen plunged Thursday, relative to contracts for selling, to the lowest level since June.

The so-called risk-reversal rate, a gauge of market positioning and sentiment, has already fallen much lower than in May 2016 when the gauge first captured Brexit risks, suggesting traders are more cautious this time around.

Finally, sovereign credit markets show a notably elevated risk of French 'risk' over Germany...

With so many hedges on in such size, one wonders just what event the 'news' will actually create?