Seeking safety, U.S. investors have snapped up gold, yen

Hedging has become all the rage as investors seek cover ahead of Sunday’s national elections in France that could signal whether the country remains in the European Union.

Prices for protection against wild swings in stocks, bonds and the euro have surged as polls have tightened and investors fretted that another unforeseen election outcome could upend a solid start to the year for risk assets.

The cost to protect against volatility in the euro hit levels last seen during Britain’s referendum to leave the EU last June, and prices for downside protection in European stocks held near their highest since the U.S. election in November.

‘Volatility increasing’

“Volatility is increasing as we head into this election,” said Kristina Hooper, global market strategist at Invesco in New York, which has $825 billion in assets.

The latest polls show a tight race, with four candidates — including two who advocate splitting France from the EU — clustered within five points of one another.

The top two finishers will advance to a run-off on May 7.

The market’s conventional wisdom had for months held that Sunday’s result would produce a second-round showdown between centrist Emmanuel Macron and far-right candidate Marine Le Pen, who wants to pull France from the EU. Mr. Macron, who favours remaining in the EU, was seen winning that head-to-head handily, with the latest Elabe poll showing Ms. Le Pen losing ground.

However, neither is totally assured a spot in the May 7 run-off round as both conservative Francois Fillon and hard-left candidate Jean-Luc Melenchon, who also favours an EU withdrawal, were seen narrowing Mr. Macron and Ms. Le Pen’s lead over them.

Against the heightened possibility that Sunday’s outcome could weaken the economic bloc, some big investors are shying from European assets. Dan Ivascyn, group chief investment officer at Pacific Management Co Inc., which oversees $1.5 trillion in assets, is among them.

Pimco is underweight France, Italy, Spain and Portugal bonds as they “are vulnerable to success from anti-establishment candidates,” Mr. Ivascyn said.

The French election is just one of a spate of worries nagging investors in recent weeks. U.S. tensions with Syria and North Korea and doubts about U.S. President Donald Trump’s ability to deliver tax cuts and infrastructure spending to spur the U.S. economy have also weighed.

“It’s just one more reason for people to cut back a little bit and not be nearly as long,” said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.

Gold, yen, treasuries

In their safe-haven response, U.S. investors have snapped up gold, Japan’s yen and U.S. and German government bonds.

The iShares 20+ Year Treasury Bond ETF gathered $75 million in the latest week, snapping three weeks of outflows.

Investors seem most anxious about a Ms. Le Pen and Mr. Melenchon run-off due to their anti-EU stance, putting either one to lead euro zone’s second biggest economy to possibly withdraw from the region’s economic bloc and common currency.

Those worries pushed up the hedging costs on potential swings in the euro against the dollar over the next 30 days to a 10-month high earlier this week. Meanwhile, the euro’s “put” bias over a one-month horizon traded at the lowest since July 2012, reflecting a view that the currency could decline.

The CBOE Volatility Index, the most widely followed gauge of U.S. stock market investors’ anxiety, rallied to a five-month high of 16.28 on Monday, pointing to increased demand for S&P 500 Index options hedges.

Its counterpart for volatility in Europe and Asia is trading near its highest since the election of U.S. President Donald Trump in early November.

In the bond market, a measure on expected U.S. yield swings in the next 30 days has risen since the end of March, reaching a two-month peak last week, according to an index compiled by Bank of America Merrill Lynch.

‘Screaming buy’

While volatility expectations for U.S. stocks have picked up from muted levels in advance of Sunday’s election, investors remain sanguine on possible fiscal stimulus from Washington and the Federal Reserve raising interest rates gradually, which would support the economy and corporate profits.

In fact, the political upheaval in Europe has the region’s equities a “screaming buy,” said Ashwin Alankar, head of asset allocation at Denver-based Janus Capital Group.