Reuters: US Dollar Report: Investors position for risk of Europe stocks rebound

Reuters: US Dollar Report Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Investors position for risk of Europe stocks rebound Jun 6th 2012, 11:10 Wed Jun 6, 2012 7:10am EDT * Talk of central bank, political action spurs rebound bets * Call options in demand on risk of possible rally * Short interest at high level raises chances of squeeze By Francesco Canepa LONDON, June 6 (Reuters) - European equity investors have started to prepare for a possible share price rebound on speculation central banks and governments may intervene to tackle deteriorating global economic conditions and a spiralling euro zone crisis. European shares are close to six-month lows, having fallen 15 percent in less than three months and struck down by weak economic data from Europe, China and the United States, as well as concerns about whether Greece can stay in the euro zone and Spain's ability to cope with its banking crisis. These financial and economic strains have raised the prospect of fresh support from the European, U.S. and Chinese authorities, leading investors, who sold European equities heavily in May and overall remain negative on the market, to worry they may be caught out by a rebound. "If we were to go towards more financial market volatility in the euro zone, it is also more likely that we will get some form of government support, whether it be monetary or fiscal," Arthur Van Slooten, a strategist with Societe Generale in Paris, said. "Despite investors' perception that the situation is not exactly improving, if your total portfolio is lined up for only one outcome you may be wrong-footed." Investors have been snapping up call options on the Euro STOXX 50 index - bets on the market rising - with open interest on the June 2012 contract rising some 17 percent in the past four weeks, according to data from Eurex exchange. By contrast, demand for puts - bets the market will fall - has been broadly stable. Other types of options also show investors protecting themselves against share price swings in both directions, rather than just down. The cost of insuring against volatility, as measured by variance swaps, has risen to historically high levels compared to the underlying options on the Euro STOXX 50 index, according to BNP-Paribas estimates. Variance swaps are derivatives that allow investors to play the difference between current and future levels of share price volatility, rather than being long or short the underlying asset. "People do consider both upside and downside event risk at the moment and this makes variance exposure good," Gerry Fowler, global head of equities and derivatives at BNP-Paribas Corporate and Investment Banking, said. Spain's borrowing costs are nearing unsustainable levels and some in markets are looking to the European Central Bank, which meets on Wednesday, to cut interest rate or make available more long-term loans in the coming months. The Federal Reserve is also under pressure to take further steps to bolster the U.S. economy and China is stepping up measures to support growth. If new monetary stimulus were to trigger a market rally, many investors would be forced to buy stocks to cover their short positions, given the high level of short selling seen in May, creating a so-called "short squeeze", which would in turn fuel further market gains. Short interest in continental European blue chips, as measured by the proportion of shares out on loan, rose to a six-month high of 3 percent in late May, according to stock lending analytics firm Data Explorers. MORE SHORTS "When you've come down this far, few people are brave enough to put more shorts on," said Justin Haque, a European trader with broker Hobart Capital Markets, who deals primarily with hedge fund clients. "They are afraid to be burned by stimulus as the record is such that just as we get close to capitulation the central bank cavalry of funny money gets everybody squeezed." Since the start of the financial crisis, European equities have enjoyed sharp rallies when central banks took action to shore up the economy and calm financial markets, most notably during the Fed's two asset purchases programmes in 2009-11 and the European Central Bank's recent rounds of cheap loans. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions