Market sees no V-shape recovery and volatility looks cheap

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Dec 2021 dividend futures on S&P 500 was trading lower while equities rallied since 23 March indicating worsening fundamentals and the dividend market is now pricing in Dec 2021 dividends lower by 38% from current levels. Volatility is also cheap as the market moves to the next phase after the first relief rally and our view is that investors should consider long volatility components for their portfolios. HSBC cut dividends ahead of European session which will put focus on banks in today's session. Also in Europe this morning Denmark is issuing its first 30-year bond in a test for the market's willingness to finance aggressive stimulus packages in Europe. Finally we focus on Abbott Laboratories which is set to gain from its latest FDA approved 5-minute test of COVID-19.


The S&P 500 rallied 21% from the lows on 23 March to yesterday’s highs driven most likely by rebalancing of institutional portfolios and technical flows due to extreme oversold levels. Interestingly enough the Dec 2021 dividend futures on the S&P 500 declined 4.5% in that same period suggesting the market was increasingly not pricing in a V-shape recovery in earnings and thus the real economy. On 20 February the dividend futures was pricing in Dec 2021 dividends at $63.70 which is 5.3% higher than current levels but as of yesterday’s close the futures prices those dividends at $37.50 down 38% from current levels. This is a 1.5% dividend yield at current levels which in our view is too low relative to bond yields and the growth risk assumed. If the no V-shape recovery materialises among the broad category of investors and especially retail investors then US equities could see new lows for the cycle.

Source: Bloomberg

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.

Source: Saxo Group

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.

Source: Saxo Group
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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 Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

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.

This advertisement has not been reviewed by the Monetary Authority of Singapore.