Temperatures Gain In German Stocks, Hedging Costs Rise
By Callie Bost
The stimulus trade in German equities is crumbling and investors are bracing for the fallout to worsen.
The attached chart shows the cost to hedge against declines in the DAX Index is the highest since at least 2006 relative to the Standard & Poor?s 500 Index, according to three-month Bloomberg data on implied volatility.
The jump in bund yields and mounting concern about the lack of progress in Greece have German equity investors paying up for protection, JPMorgan Chase & Co. derivatives strategists led by Marko Kolanovic wrote in a note Friday. The DAX slid 7.5 percent from an April 10 record through Friday, after soaring more than 25 percent this year on optimism that a new round of quantitative easing could bring life to the European economy.
?The DAX has rallied explosively this year,? said Michael Purves, the Greenwich, Connecticut-based chief global strategist and head of equity derivatives research at Weeden & Co. ?A market that shoots up super fast in a one-sided quantitative easing trade, such as the DAX, is a recipe for higher volatility. That spread is at multi-year highs for understandable reasons.?