The Evolution of European Equity Risk

There are many ways in which investors can evaluate risk related to the euro zone. Credit default swaps for sovereign debt are one way to evaluate the risk of country default. Sovereign bond yields are a good proxy for a country’s access to funding via the credit markets. The euro crosses and related directional moves are a barometer of the strength of the currency and the euro zone countries as a whole, while various Intrade contracts can lend a sense of the probabilities that investors assign to various events, such as to the risk of one or more countries dropping the euro.

On the volatility side, the VSTOXX (EURO STOXX 50 Volatility Index) the EVZ (CBOE EuroCurrency Volatility Index) provide a market assessment of risk and uncertainty in euro zone stocks as well as the currency.

One piece of analysis I have not seen, however, is an assessment of the relative risk and uncertainty for equity markets in some of the more important euro zone nations. Specifically, Spain, Italy, France and Germany. The chart below attempts to offer up that very information, using 30-day implied volatility for the various country ETFs over the course of the past six months:

• EWP – Spain (red line)
• EWI – Italy (blue line)
• EWQ – France (green line)
• EWG – Germany (yellow line)

Looking at the chart, what initially catches my eye is the recent evolution of the two-tiered risk system. In the first half of the year, the higher risk is clearly associated with Italy and France, whereas Spain and Germany appear to be considerably less risky in terms of implied volatility. By the March the risk appears to have lessened across the board and the distinctions between individual countries is more difficult to discern. Over the course of the last 1 ½ months or so, a new two-tiered system has appeared. This time around it is Italy and Spain where the risk to equities is considered to be the greatest, with France now joining Germany in the lower risk tier.

In essence, Italy has persisted in the high risk tier and Germany has been a constant in the lower risk category. Over the course of the past few months, the interesting development has been the switch between France and Spain, with the former improving from being a peer of Italy to a peer of Germany, while Spain has moved in the opposite direction.

One could certainly argue that all four countries are in the same boat (taking on water, with shoddy life preservers, in shark-infested waters and being one small mutiny away from having no captain…), but clearly investors think there are important distinctions to be made in terms of equity risk and uncertainty. Perhaps of more interest, these fortunes appear to be shifting, with little perceptible difference not just between Spain and Italy, but also between Germany and France.

Related posts:

• Euro Volatility and Risk
• Greek Elections and the Future of the Euro
• Handicapping the Chances of Greece Dropping the Euro
• Chart of the Week: VSTOXX, VIX and the Risk of Global Contagion
• The Hollande Discount
• Expectations, Surprises and Fear in 2011
• Chart of the Week: European Stocks Holding Up Well
• Recent Performance Divergence in European ETFs
• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Are You Watching Greece?
• Why Not Point Hedges?
• St. Louis Fed’s Financial Stress Index

[source(s): LivevolPro.com]

Disclosure(s): Livevol is an advertiser on VIX and More

A German Perspective on the Recovery

Yesterday, in Fundamentals and the Recovery, I offered up a snapshot of the recovery in the United States in terms of industrial production, income, employment, and retail sales.

Today, I thought I’d at least temporarily jettison my overly Americentric view of the investment universe and look at the recovery in the same areas through the eyes of Germany. As the graphic below shows, relative to past periods of economic recovery, the current recovery looks more typical than atypical. With a continued weak euro, I would not at all be surprised to see the performance of the German economy to begin to accelerate to the upside, which would bode well for the Germany ETF, EWG.

Of course, the bigger issue may turn out to be the exposure of German banks to Greece and some of the other troubled euro zone economies, per a recent Wall Street Journal, Data Show Big Exposure for Banks in Euro Zone.

For more on related subjects, readers are encouraged to check out:

• Recent Performance Divergence in European ETFs
• Fundamentals and the Recovery
• Chart of the Week: A Broader Look at the U.S. Economic Recovery
• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales Recovering

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

Recent Performance Divergence in European ETFs

With all the turmoil in Europe, I thought it would be interesting to check on some of the single country ETFs for those nations which have been closest to the sovereign debt crisis. The chart below, courtesy of ETFreplay.com, captures the year-to-date price movements and (historical) volatility for the likes of Germany, France, Italy and Spain.

Not surprisingly, Germany has held up the best and Spain has been the worst performer in 2010. France, which had been tracking fairly close to Germany, has fallen into second as the country’s bank exposure to Greece has saddled France with additional risk. Italy, which has been on the periphery of the contagion concerns, has fared only slightly better than Spain and has actually been the worst performer of the four during the last month and a half as the crisis has deepened.

Also, note that as is often the case, volatility is negatively correlated with performance in these countries, as the largest moves have been negative ones.

For more on related subjects, readers are encouraged to check out:

• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Are You Watching Greece?

[source: ETFreplay.com]

Disclosure(s): long EWG at time of writing