Investors are hedging the fall in European stock market

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Cautious investors are buying derivatives that will protect them in case this year’s rally in European shares breaks, in a sign of growing concerns that slowing economic growth will weigh on markets sitting near record highs.

Traders are buying put options in increasing numbers, which provide insurance against declines in prices relative to calls, which pay when the market moves up. Bank of America analysts said that by doing so, they highlight “underlying nervousness” about European stocks despite their recent rally.

The put to call ratio tied to the blue-chip Euro Stoxx 50 benchmark has reached its highest level in a decade, BofA data showed.

The index – which includes luxury goods group LVMH, chip equipment maker ASML and industrial group Siemens – has risen 14 per cent since January to its highest level since 2007. The eurozone economy plunged into a mild technical recession in June after two consecutive quarters of contraction. ,

“Fundamentally, we are still in a place where (Europe’s) growth outlook is not surprising,” said Abhinandan Deb, head of global cross asset quant investment strategy at BofA Global Research. “People are in (Europe) for an uncomfortably long time. They are tall because they need to participate, but the fundamental conviction is not there. Nobody wants to take this market that close to its top.

Alexandru Bohotin, head of European index options trading at Optiver in Amsterdam, said he has seen more demand for “downside protections” from investors in European stocks, especially as investors begin to reinvest in equities after being underweight for most of the year. Have given. “They are protecting their portfolios by buying puts, which is driving up metrics like the put/call ratio,” said Bohotin.

Other investors say a recent slowdown in activity in Europe’s hitherto resilient services sector also bodes poorly for local stock markets.

S&P Global’s Eurozone Services Purchasing Managers’ Index, a measure of activity in services, fell for the second month in a row in June to 52, indicating continued expansion, although at the slowest pace since January.

The slowdown in services sector momentum could soon begin to weigh on European equities, which have climbed higher so far this year – defying many investors’ expectations – even as the European Central Bank announced measures to combat inflation. raised interest rates at an unprecedented pace.

As services account for about 70 percent of economic activity in the euro area, the services PMI is viewed as a strong leading indicator of stock price performance due to its high correlation with services activity.

“The whole boom in share prices in Europe after last winter was due to this boom in services. People thought and still think that the economy remains resilient,” said Tomasz Viladec, chief European economist at T Rowe Price.

However, “(Services PMI) will likely move down significantly as part of the natural monetary policy tightening cycle and this is something the markets are not ready for,” he said, noting the euro area services PMI’s “high correlation” with the European Used to be. Share price movement in the last three years.