Investors hedging against Greece, but no panic seen
Global investors are hedged against a potential exit of Greece from the euro zone ahead of Sunday’s referendum, but they’re not betting on a huge fallout in financial markets even if there is a negative outcome.
Currency, bond, and equity investors have turned defensive, trimming exposure in the euro zone. They’re generally of the mindset, though, that a last-minute deal will be struck and it will be an opportunity to snap up euro zone assets again.
Greeks are set to vote on Sunday on whether to accept austerity terms in order to continue receiving international aid. Most US investors expect them to approve the terms, though polling in Greece is unclear.
"You definitely want to protect portfolios and not experience big drawdowns in the face of volatility," said Raman Srivastava, co-chief investment officer and managing director of global fixed income, at Standish Mellon Asset Management in Boston. The firm oversees US$170 billion in assets.
The expectations for more gyrations can be seen in currency hedging. One-month implied volatility in the euro’s exchange rate against the dollar, for instance, has been on an uptrend since August of last year.
In equities, there has been increased hedging. Open interest in S&P 500 put options, which rise in value if the stock index declines, jumped nearly seven per cent to 7.7 million contracts on Monday.
Open interest in CBOE Volatility Index call options, typically used to bet on a rise in volatility, has increased to 5.4 million contracts, up 6 per cent from Friday. Calls betting on the CBOE Volatility Index, or VIX, Wall Street’s favoured anxiety gauge, rising above a reading of 23 by mid-July are the biggest block of open interest at nearly half a million contracts. The spot VIX is currently trading at 17.
Still, there is no sense of panic among equity investors, market participants said.