Investors seek shelter before Greek vote

London - Traders and investors are taking all bets off the table before this weekend’s Greek elections, which may decide whether Athens stays in the eurozone.

Greece votes on Sunday in a second attempt to choose a government that will decide whether to back the terms of its international bailout.

G20 officials say central banks are ready to act to calm markets if needed.

But investors are not taking any chances.

“People are just totally hands off, they don’t want to know. Why would anyone want to deal this side of the weekend?” said Steve Larkins, head of sales trading at Seymour Pierce.

“With the Greek elections coming up, Monday morning could be a disaster for someone taking a big bet over the weekend.”

Hedge funds, typically among the most aggressive market players, are also wary, taking on only 10%-30% of their maximum permitted bets on risky assets, said Gerry Fowler, global head of equity and derivative strategy at BNP Paribas.

“There are so many risks that just can’t be modelled... it really creates a market where no one can do anything with conviction and it’s a matter of wait and see,” he said.

Global fund managers’ cash balances have jumped to 5.3% this month, their third-highest level on record, according to a Bank of America Merrill Lynch survey.

Equities investors have been reluctant to roll over, or replace, options contracts which expire on Friday, as they opt for neutral positions.

Some 1.4 million futures contracts on Euro STOXX 50 index of eurozone blue chips are yet to be rolled over, according to Eurex data.

Shake out

The shaking out of positions has led to high volumes. Monday was the Euro STOXX 50 index’s most active day of 2012 and this has been one of the year’s most active weeks.

In currency markets, the euro has rallied versus the dollar  - arguably a counter-intuitive move given the eurozone crisis.

Traders say the rebound has been driven by investors’ desire to unwind the large number of net short bets built up in the single currency.

“As far as the euro/dollar is concerned, I am going square into the Greek elections. I have a feeling, either way, things will drag on for a while and that gives us enough reaction time,” Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Partners.

Position squaring was a factors behind a selloff this week in safe haven German government debt, which had been a favourite place for investors to sit out the crisis, even if that meant paying Berlin for the privilege.

“Positioning is pretty square,” said one London-based bond trader.

“People might still be a little bit long in longer-dated bonds but that’s probably because they haven’t been able to get out... A lot of bets have come off the table.”

Another trader said the moves in the Bund futures signalled “that a lot of desks are either taking less risks themselves or have been told (to) stop taking risk until after the election”.

Most sellers of insurance against a default on Greek government debt, known as credit default swaps (CDS), declined to quote before the weekend, dealers said.

“I’d be surprised if anyone would want to dive in before the election with (Greek) bonds trading at 10 cents on the euro.

"If we get some stability with the election then we’d expect trading to pick up again,” said one head of European credit trading at a major US bank.

Ready for rollercoaster

Investor nervousness is evident in the big gap between actual volatility on the Euro STOXX 50, which has fallen to two-month lows below 20, and the implied volatility as measured by the VSTOXX which has stayed stubbornly high around 32.

“The spread between realised and implied volatility has gone up in a way that would explain the market is pricing in some Greek weekend risk,” said Abhinandan Deb, European head of equity derivatives research at Bank of America Merrill Lynch.

Implied volatility reflects options pricing and is a measure of expected price swings.

In the currency market, one-week implied volatilities have jumped to around 15.40%, the highest in six months and almost double the level of realised volatility.

“Expect a rollercoaster in the markets,” said Stefan Angele, head of investment management, Swiss & Global Asset Management, although he advised keeping some positions, such as an "underweight" stance on the financial sector.

With so much nervousness and so much money off the table, the markets could be poised for wild swings come Monday morning.

“There is a gigantic number of shorts in euro/dollar so any headline that comes out over the weekend that indicates that Europe is safe will create the scope for a massive squeeze up on Monday,” said Jeremy Batstone-Carr, director of private client research investment strategy at Charles Stanley.