Bets on $2.7 Trillion of Europe Stocks Are Veering From the Euro – Bloomberg

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The outlook for Europe’s single currency is diverging from that of its biggest companies.

The change can be seen in the market for three-month options, with traders taking positions on the euro against the U.S. dollar — the world’s most-traded currency pair — and on the 2.4 trillion-euro ($2.7 trillion) Euro Stoxx 50 Index.

Over the past two months, fund managers and speculators have been paying relatively more for calls that bet on the euro advancing against the U.S. dollar. At the same time, they’ve paid less for bullish options on the 50-member equity index. This has produced the biggest divergence in outlooks of 2017.

Money managers have begun to look with fresh eyes on the two asset classes for many reasons, one of which being that they see the European Central Bank inching toward reducing its quantitative-easing stimulus program. Delays in the implementation of U.S. President Donald Trump’s economic policies are also weighing on the dollar.

“Sometime after September begins, we’re expecting the ECB to announce measures to reduce stimulus, and that will clearly push the euro higher,” Pedro Servet, head of currency trading at Citigroup Inc. in Madrid, said in an interview. “At the same time, there’s continuing investor disappointment that President Trump hasn’t carried out economic policies he proposed, and that’s hurt the dollar.”

European stocks have benefited since the ECB began lowering borrowing costs in 2015, but after valuations reached a two-year high in May, the Euro Stoxx 50 began trimming its annual advance.

“Stocks are not cheap anymore,” said Anthony Benichou, a cross-assets sales trader at Louis Capital Markets in London. “People have been selling their calls on stocks because they don’t see them rising anymore.” At the same time, “the euro upside is a play on lower political risk in Europe and QE potentially unwinding.”

The increased bearishness in equities comes as fund managers who have made significant gains look to lock in profits after the region’s major indexes began moving sideways a few weeks ago. Since a high on May 5, the Euro Stoxx 50 has lost about half of its annual gain. On the other hand, the single currency appreciated 4.6 percent this year through May 5, and then kept on strengthening — adding another 3.6 percent.

Analyst assertions are plenty on the relationship between the currency and large-cap stocks. A strong euro is often said to be bad for local companies because it hurts export earnings, while a weak euro should result from low interest rates — something good for corporations.

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