* Low volumes show investors sitting out market move
* Short-term players buying risk assets on dips
* Interest in one-month downside protection picks up
By Toni Vorobyova and Nia Williams
LONDON, March 18 European investors said a
surprise bank tax in Cyprus was not a reason for a sustained
market drop and some saw Monday's weakness as an opportunity to
buy stocks and the euro.
The weekend announcement that Cyprus would tax bank deposits
as part of a 10 billion euro ($13 billion) bailout by the
European Union broke with previous practice that depositors'
savings were ring fenced.
The euro, euro zone equities and Italian
and Spanish sovereign bonds
initially fell in reaction to the news but all recovered some of
the losses by mid-session.
Equity volumes were quite subdued given the size of the move
in risk assets, suggesting that longer-term players did not join
the sell-off, holding on to stocks that offer much higher
dividends than U.S. peers and are cheaper relative to earnings.
Euro zone banks were the worst hit, but investors
thought that weakness could prove short-lived.
"It's affecting my portfolio this morning because I am a bit
overweight financials. I am not doing anything about it. My
initial thoughts are that this is a circumstance that is
peculiar to Cyprus," said Kevin Lilley, European equities fund
manager at Old Mutual Asset Management.
"I don't have any cash in my portfolio but, if I did, I
probably would have used it as a buying opportunity."
He added that the worst case scenario for European stocks -
and the one that would prompt him to reconsider his holdings -
would be if Cyprus parliament rejects the bailout when it votes
Neil Dwane, chief investment officer for Europe at Allianz,
Didier Duret, global chief investment officer at ABN-AMRO
Private Banking, Nicola Marinelli, fund manager at Glendevon
King, and Lorne Baring, managing director at B Capital, all said
they were sticking to their current investments in Europe.
"Selling positions or taking protection now is trying to
close the door after a horse has bolted," said Baring, whose
holdings include a long bet on the German DAX index.
"In the end, probably Europe and global markets will ride
through this okay."
Stocks have rallied and bonds fallen since the European
Central Bank said last summer it was committed to the euro and
would buy bonds of troubled members if needed. Investors said
this promise provided reassurance through near-term volatility.
"After the initial euro decline, we expect a rebound,"
analysts at Morgan Stanley said in a note. "We do not think that
it is the time to position for the longer-term euro weakness we
expect, as the periphery still offers relatively high yields and
risk is mitigated by the OMT (ECB's bond buying) backstop."
Those who did want to prepare for a possible continuation of
the sell off were using derivatives.
Implied volatility on the euro and euro zone blue
chips - which is based on options prices and rises at
times of investor demand for protection - jumped. So did
appetite for near-term put options, which give investors the
right to sell stocks or the currency at a pre-set price.
Ion-Marc Valahu, who runs Geneva hedge fund Clairinvest, was
among those who bought implied volatility on EuroSTOXX 50,
adding to already held positions on expectations of "at least a
5 percent sell off soon" in equities.
However, the biggest moves were on the one-month horizon,
with longer-dated volatility more subdued, signalling that any
market weakness is expected to be fairly short-lived.
"There's some stress here with the short-dated vols going
higher. People are a lot more worried about the downside," said
Olivier Korber, options strategist at Societe Generale.
If the Cyprus situation did get worse, the euro - which has
had a very strong start to the year - may suffer.
"Contagion on the bond side to some of the other peripheral
markets will be short-lived but the euro as a currency will
definitely be the one that bears the brunt if there is an
increase in risk aversion and uncertainty about the European
project," said Dagmar Dvorak, director of fixed income and
currencies at Baring Asset Management, sticking by her
underweight position on the European currency.