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French vote widens gulf in U.S.-Europe stock volatility expectations

| NEW YORK, April 20

NEW YORK, April 20 Days ahead of France's presidential election, volatility indexes measuring stock price uncertainty in European shares versus U.S. stocks have diverged to their widest margin since just after Britain voted to leave the European Union.

As of Thursday, European stocks are primed for a burst of near-term volatility, while the U.S. equity options market exhibits only a mild uptick in expectations for big gyrations.

The spread between Europe's main gauge of equity market anxiety, the Euro STOXX 50 Volatility index, and the CBOE Volatility Index, the most widely followed gauge of U.S. stock market investors' anxiety, has widened to its largest margin since July 7, 2016, just weeks after Brexit.

The gap between May futures on the two indexes has also widened.

"We think these have probably widened due to the election," said Matt Thompson, co-head of the Volatility Group at Typhon Capital LLC, in Chicago.

French voters go to the polls on Sunday with opinion polls making independent centrist Emmanuel Macron the favorite. But the gap separating him from the other top three contenders - Marine Le Pen on the far-right, conservative Francois Fillon and far-leftist Jean-Luc Melenchon - has narrowed.

Melenchon's surge in polls following strong TV debate performances in late March and early April has rattled markets in recent days. Investors are now grappling with the prospect of a May 7 run-off between Le Pen and Melenchon - both eurosceptics.

The widened gap in volatility expectations is due to a sharp spike in volatility expectations for European stocks as U.S. investors have largely taken a more nonchalant attitude.

"In any situation like this we would expect that the geographic location from where the concern is emanating will experience the brunt of that in capital markets. And that's exactly what we are seeing," said Bill Merz, senior market strategist at U.S. Bank in Minneapolis.

The wide difference in volatility expectations, however, is unlikely to persist beyond the election, no matter who wins, Typhon's Thompson said.

"Either volatility will rise on both sides and the VIX will catch up to the VSTOXX, or VSTOXX might catch down a bit to the VIX," he said.

Owning VIX calls against VSTOXX puts would be a simple way to profit from the narrowing of the spread in expectations.

Buying a call conveys the right to purchase shares at a fixed price in the future, while buying puts conveys the right to sell shares.

(Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Dan Grebler)

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