The fight between sentiment and fundamentals

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  In today's equity update we focus on South Korea and the resurgence in new COVID-19 cases, the VIX dipping below 30 and term structure in contango suggesting that the bear market dynamics could soon end, Brazilian equity market trading a deep discount to global equities and finally that the market for fundamentals is still reluctant to jump on the bandwagon of optimism as seen in US technology stocks.


Equities are generally positive this morning as the market is still pricing in a V-shape recovery putting little weight on last week’s dire macro figures ending the week with the US unemployment rate hitting 14.7% in April. We are technically positive on the market as long as the NASDAQ 100 Index remains above its 15-day SMA but we still struggle to be positive on equities based on fundamentals. What are some of the key things to watch in equities today?

KOSPI 200 down 0.6% - number of COVID-19 cases have recently surged and today saw 34 new cases the highest since 9 April as new chains of the virus has started at nightclubs in Seoul. This comes after Germany just announced that its R0 (virus reproduction value) increased to 1.1 as it opened up society. These stories tell us that reopening the economies may not be that easy and LesEchos has in collaboration with Kayrros-EY Consulting made a new real-time economic activity index based on satellite images. This shows that Chinese activity despite reopening is still down 25% from levels before the COVID-19 outbreak.

Source: LesEchos

VIX dips below 30 – on Friday the VIX Index dipped below 30 for the first time since late February in a signal that option markets are betting on less volatility the next 30 days. The VIX futures term structure has also shifted into the classic contango which should begin to favour selling volatility strategies. This means that the market is structurally beginning to set itself up for normality. The equilibrium point in VIX is historically around 22 so if the index dips below this we are officially out of the bear market dynamics.

Brazilian equities down 51% from peak – while many equity markets have recovered somewhat the Brazilian equity market is still down significantly from the peak in USD terms. Sentiment is obviously bad due to a gross mismanagement of the COVID-19 outbreak by the government but with Brazilian equities valued at a 55% discount to global equities it may be worth making a bet on this EM market. Given the uncertainty over EM markets and the rebound one should consider placing the bet with call options on the main index or an ETF tracking the equity market.

Source: Saxo Group

Dividend futures are flat – fundamentals are traded in dividend futures in both the US and Europe and here we still observe little price action to the upside. Compared to a month ago the curve for the S&P 500 has not moved much except for a little higher in 2020 and 2021 but still at same levels further out the curve. In other words the market for fundamentals are not following the speculative fever we observe in US technology stocks. S&P 500 is valued almost 20% above the median valuation point of the expected distribution for 2021 dividends in the S&P 500.

Source: Bloomberg and Saxo Group

Last week US technology stocks increased their share of the US equity market even further pushing the index concentration closer to an all-time high. Online and technology stocks are perceived as a sure bet fueling the rally but it reminds us of the Nifty Fifty period in the US back in the 1960s/70s when a group of 50 growth stocks were perceived as sure winners sporting very high valuations relative to the rest of the equity market. Growth could not live up to expectations and these 50 stocks caused a prolonged hangover for the US equity market. Could it happen again?

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.