European equity markets are warning of greater volatility in coming months, as the European Central Bank prepares to cut its stimulus programme and anxiety grows ahead of upcoming elections.
Futures contracts in the Vstoxx — a measure of implied volatility for the benchmark Euro Stoxx 50 index — reflect expectations of a blip as after the ECB cuts its monthly bond purchases at the end of March and before the first round of France’s presidential election.
Prices for the April Vstoxx contract has risen 4 per cent over the past week to 23.7. Over the same period, prices in the March contract are effectively unchanged at 18.8, while those for May are steady at 22.4.
Volatility in 50 key European stocks has declined over the past year, in January plumbing to its lowest level since 2014.
But elections in the Netherlands in March and France in April are straining market nerves, with many taking the view that a gradual retreat from the ECB will bring national risks to the fore.
Early signs of higher equity volatility come alongside a global trend in which bond yields have risen as an extended period of low rates draws to a close.
The ECB has said it will reduce bond purchases from €80bn to €60bn a month after March.
The central bank has bought more than €1.5tn of assets, supporting bond and equity prices and pushing yields to historic lows.
That trend has started reversing with yields in Italy and France leading the way.
In Italy, where the banking system is weighed down by non-performing loans, yields have risen to 2.4 per cent — their highest level in a year. The difference between yields on Italy’s 10-year bond over Spain’s equivalent is now at its highest level since 2012.
French bonds have reached their highest level over the 10-year Bund since January 2014.
Signs of higher uncertainty come as data show issuers rushing to sell new bonds at the fastest pace on record. January was the busiest month on record for new bonds sold in euros, according to Dealogic
“Given that we are getting into the endgame of QE, and with political risk on the horizon, you expect front-loaded issuance compared to previous years,” said Aditya Chordia, a rates strategist at JPMorgan.
A total of €184bn of euro-denominated bonds were sold in the first month of 2017, an 11 per cent rise year on year and the highest ever volume, according to Dealogic.
Total sovereign bond issuance, at €91bn, was also the highest level on record and more than 40 per cent above last year’s sales.
The fast pace of activity came alongside a busy start to the year in the US, where financial bond sales also broke records ahead of expected increases in interest rates.
Overall, global bond sales have run at their fastest pace since 2013.
