Market sees no V-shape recovery and volatility looks cheap

With S&P 500 selling off again not being able to push through the critical 2,641 retracement level yesterday volatility will likely be bid today. The VIX level and term structure still suggest downside risks to equities and we still view long volatility as a good component to have in the portfolios to hedge market and liquidity risks. Given the volatility of volatility most standard portfolios do not need more than 1-2% exposure to long volatility instruments.

During Asian session HSBC announced that the Q4 dividend would be cancelled something that had been priced in dividend markets already but nevertheless the market took it as a surprise sending shares down 9% in Hong Kong trading. Both BOE and ECB have pushed banks in the UK and Europe to cancel dividends and drastically cut bonuses to preserve capital for what seems to be a tough recession ahead.

In Europe this morning news is surfacing that the Dutch PM is facing criticism internally in his own coalition over his tough stance against coronabonds (read about the concept here) to help Southern Europe fighting the COVID-19 virus and its shock to the economies. In Denmark the government will issue its first 30-year bond in more than a decade (DKK 5bn of 0.25% coupon 2052 at 0830 GMT) which will be the first indication of capital markets’ willingness to finance large stimulus programmes in Europe.

Abbott Laboratories will be in focus this month as the company has got FDA approval for 5-minute test for COVID-19 which will be portable and thus possible to provide to clinics and general practitioners. This type of test, which happens to be the fastest in the world, is crucial as countries will need widespread testing procedures as countries open up following lockdowns. Given the global size of the COVID-19 testing market this could be big for Abbott and we see observe heavy volume in April call options at the $100 strike level and in May call options at $90/$95/$100 levels.