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 this week 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 this week 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 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 runoff 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. Macron, who favors remaining in the EU, was seen winning that head-to-head handily, with the latest Elabe poll showing Le Pen losing ground.
However, neither is totally assured a spot in the May 7 runoff round as both conservative Francois Fillon and hard-left candidate Jean-Luc Melenchon, who also favors an EU withdrawal, were seen narrowing Macron and 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," 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.
In their safe-haven response, U.S. investors have snapped up gold, Japan's yen and U.S. and German government bonds.
The SPDR Gold Shares ETF is the No. 5 selling U.S.-listed ETF this month, according to MorningStar Inc.
In fact, with gold hitting its highest price since early November this week, the GLD raked in $755 million in the week ended April 19, its biggest inflow in two months, according to Lipper data.
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 Le Pen and Melenchon runoff 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.
Since mid-March, Matt Thompson co-head Of Volatility Group at Typhon Capital LLC, in Chicago, has been accumulating long VIX exposure via call options in the April-May timeframe. The trade seeks to profit from an anticipated run-up in volatility ahead of the French election, Thompson said.
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.
Déjà vu for stocks
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.
Moreover, stock prices have shown resilience from steep but short lived sell-offs after Brexit and Trump's victory last year, investors said.
"Brexit was this temporary blip, and that should be the same here," said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco.
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.