Europe’s Fear Gauge Signals Turbulence Around French Election

Investors are betting on heightened volatility in Europe’s stock market during April, when the first round of the French presidential election.
While calm has blanketed the U.S. stock market to a degree not seen in years, European investors are wagering on volatility ahead.
The CBOE Volatility Index, the VIX, which tracks expectations for price swings in U.S. equities, fell on Friday to 10.58, its lowest closing level since July 2014. Meanwhile, its European counterpart is signaling turmoil three months from now. Both measures tend to move in the opposite direction of their respective equity benchmarks.
In an unusual occurrence, investors are betting on heightened volatility in Europe’s stock market during April, when the first round of the French presidential election takes place on April 23, than farther out in the future. The futures curve of the Euro Stoxx 50 Volatility Index, called the VSTOXX, is showing contracts for April are pricier than those for the next months.
The futures curve of the VSTOXX typically slopes upward because there tends to be greater uncertainty in the long run and investors pay a premium for contracts that expire later.
“The French election has been a key focus point for investors,” said Kokou Agbo-Bloua, London-based managing director at Société Générale SA, a market maker of VSTOXX options products.
J.P. Morgan Chase & Co.’s Davide Silvestrini recommended in a Jan. 24 note that investors should buy April futures for the VSTOXX, while selling the May contracts to bet on rising risk leading up to the election. Far-right National Front leader Marine Le Pen, who has advocated for the nation leaving the European Union, and center-right Republican François Fillon, who favors austerity measures, are leading in the latest polls.
While hope that President Donald Trump’s economic policies will fuel growth has propped up equity markets in the U.S., some investors are looking ahead to elections in Europe this year after populist movements swept through Britain, the U.S. and Italy in 2016—sometimes causing market shocks.
Ms. Le Pen, who has dubbed herself “Madame Frexit,” has detailed a strategy for France to pull out of the European bloc and its single currency if she wins. Should no candidate win a majority on April 23, a runoff between the top two candidates is expected to be held on May 7. Polls show Ms. Le Pen would easily qualify for the second round but then lose against the pro-European Mr. Fillon.
The VSTOXX hit a peak of 39.9 on June 16, one week before the British referendum to exit from the EU. The measure closed on Friday at 15.61. Futures expiring in April are currently priced at 22.65, or 2.4% higher than the May contract.
The spread between the European VSTOXX and the U.S. VIX also has increased to the widest since early December. That spread “will widen more because investors will get more nervous as we get closer” to the French election, said Mr. Agbo-Bloua.
Should another Brexit-like event rattle global markets this year, American investors may have another tool to bet on the resulting turbulence. On Feb. 1, Eurex Exchange is expected to introduce new options on VSTOXX futures. The product, which has been approved by the U.S. Commodity Futures Trading Commission, will be structured like U.S. contracts, which means that the options can be exercised any time during the life of the contract, rather than only on the expiration date, according to Eurex.
VSTOXX futures volume peaked around the U.S. election and the December Italian Referendum, according to data from Eurex, Europe’s largest derivatives exchange.
“What we’re doing right now is recalibrating the specifications of our VSTOXX options in a way that we can easily open it up to our U.S. investors,” said Zubin Ramdarshan, the head of product research and development for equities and indexes at Eurex. American investors previously had to turn to the over-the-counter market to access VSTOXX options, he said.
Investors also can arbitrage opportunities between the European index and its U.S. cousin, market participants say.
“European volatility has been in vogue recently,” said Société Générale’s Mr. Agbo-Bloua. “One popular trade has been to buy VSTOXX options and finance the options by selling options on the VIX.” This trade has been in favor particularly with investors “who view the source of volatility as coming from political risk in Europe,” he said.

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