The recent surge in volatility in the currency market has done little to disturb the relative calm that investors in European stock markets are betting on.
With US markets closed for Thanksgiving, European shares were little changed yesterday and have moved in a tight trading range for the past few months. This is despite the euro having weakened almost 7% against the dollar since August.
That’s pushing the VStoxx Index measuring expectations for equity swings or volatility to a one-year low relative to euro-dollar swings.
The weaker euro is failing to boost European stocks as it did last year. Political risks are at the centre of investors’ concerns. The dollar was only slightly weaker yesterday, while the euro eased to below 84.7 pence against sterling. Following Brexit traders are awaiting Italy’s constitutional referendum next month and 2017 elections in France.
“The disparity is due to the fundamental versus speculative approaches,” said Ben Kumar, London-based investment manager at Seven Investment Management.
“If you are a speculative investor, the Euro Stoxx is not an attractive short-term trade with reasonably high valuation and good earnings but lots of political risk,” he said.
The Euro Stoxx 50 Index — which tracks the continent’s most valuable companies whose shares trade on stock markets — is trading at 13.2 times estimated profit, a higher multiple than its five-year average.
The euro was little changed against the dollar, after slumping to its lowest since March 2015 earlier this week amid bets that a US interest-rate increase is imminent.
Traders are pricing in a 100% chance the US Federal Reserve will act next month. The VStoxx volatility index dropped 0.8% at one stage for a third straight decline.
The measure is on track for its biggest monthly slide since July, with Europe’s equities also heading for a decline in the period. While the Euro Stoxx 50 posted annual gains every year since ECB president Mario Draghi pledged to do whatever it takes to save the euro, it’s now poised for its worst annual decline since the peak of the sovereign-debt crisis in 2011.
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