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