EWQ Wrestles With Resistance, Pre-Election Fear

The spread on April VIX and VSTOXX futures is at its widest level since Brexit

Feb 13, 2017 at 12:27 PM
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The iShares MSCI France ETF (EWQ) has come into focus ahead of the French presidential election. Marine Le Pen, representing the populist National Front party, has vowed to renegotiate the terms of France's European Union (EU) membership, if elected, leading to increasing "Frexit" speculation. According to polling firm Ipsos Mori, 80% of French citizens believe the nation needs a "strong leader willing to break the rules" -- which could work in Le Pen's favor.

Amid the geopolitical uncertainty, EWQ has been backing down from the $25-$25.50 area, which served as resistance in mid-2016, as well. Just above this zone is the 50% retracement of the exchange-traded fund's (ETF) 2014 peak to 2016 bottom, which could reinforce the overhead speed bump. Additionally, EWQ was last seen at $25.15, and approaching a 10% gain off its late-November bottom, which could be yet another hesitation point.

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Interestingly, the gap between volatility expectations in the U.S. and Europe has expanded to its widest level since the lead-up to the June 2016 Brexit vote. This is based on the spread between three-month futures on the CBOE Volatility Index (VIX), which are coming off a record short position, and Euro Stoxx 50 Volatility ETF (VSTOXX) -- the main fear gauges for the U.S. and Europe, respectively. According to BMO Capital, the "widened gap shows the market is pricing in significantly greater uncertainty in Europe than the U.S."

How should options traders play stocks in this climate? Earlier, Schaeffer's Senior V.P. of Research Todd Salamone recommended a short-term stock replacement strategy, in light of potential policy shakeups from the Trump administration and Fed. Specifically, Salamone noted that a possible volatility pop "is a risk worth keeping on your radar, especially if the market gets spooked by the Fed or by disappointing news out of the White House."

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