The stock market’s fear gauge slips to its lowest since late February as virus concerns wane; Once taboo, investors begin to imagine negative U.S. rates

May 12, 2020

Lead Stories

The stock market’s fear gauge slips to its lowest since late February as virus concerns wane
Ben Winck – Markets Insider
Wall Street’s preferred volatility index on Monday slid to its lowest point since February 26, indicating the calmest market backdrop since the coronavirus sell-offs began.
Cboe’s VIX index, which measures S&P 500 volatility through options contracts, is commonly viewed as a market “fear gauge.” The metric soared to record highs through March as the coronavirus pandemic and global oil-price war drove outsized volatility. The index then peaked at 83 on March 16 before posting a bumpy decline over the following weeks.

Once taboo, investors begin to imagine negative U.S. rates
Saqib Iqbal Ahmed and Tom Westbrook – Reuters
Negative interest rates in the United States were once unimaginable. The coronavirus has changed that. While the Federal Reserve has all but ruled it out, the sweeping economic and financial-markets impact of the pandemic has forced investors to give serious thought to the implications of such a drastic policy shift. Rate options, which gauge monetary policy expectations, on Monday implied a 23% probability that the key federal funds rate will go below zero by the end of December, according to BofA Securities data, which cited short expiry options on one-year U.S. swap rates. That compares with a 9%-10% probability last week.

Goldman warns of an 18% stock-market drop as coronavirus cases steadily rise
Chris Matthews – MarketWatch
U.S. stocks have ridden a wave of optimism over a foreseen rebound in a U.S. economy battered by the coronavirus epidemic, but, as the stock market again reaches historically expensive levels, Goldman Sachs analysts warn that investors should be wary of virus-related risks to the rally.
“In six weeks, as the S&P 500 index SPX, -0.13% has soared by 30%, investors have raced from despair at the market bottom to optimism about the economic restart,” wrote David Kostin, chief U.S. equity strategist at Goldman, in a note to clients, adding that, at Friday’s closing level of 2,929, there is little room for further upside, given a year-end target of 3,000.

Goldman Adds Fidelity Plumbing Option for Hidden-Asset ETFs
Katherine Greifeld – Bloomberg
Goldman Sachs Asset Management is moving deeper into the nascent business of offering ETFs that partially conceal holdings, adding Fidelity to its roster of service partners.
GSAM agreed to license Fidelity’s methodology to create actively managed, semi-transparent exchange-traded funds, the asset manager said in a statement Monday. In January, GSAM filed with the Securities and Exchange Commission for a multi-asset ETF using the so-called ActiveShares model from Precidian Investments.

Tencent to Have a High Bar to Leap Over This Earnings Season
Jeanny Yu – Bloomberg
Expectations are running high for Tencent Holdings Ltd. when it reports earnings Wednesday after optimism over its video game business helped push the stock to a two-year peak.
The trading volume of call options, which are bets on gains in the share price, jumped to nearly 120,000 on Monday, more than three times the 20-day average. A measure of bearish wagers relative to bullish ones is at the lowest in more than a year. The 6.3% implied move by the stock on Thursday morning would be the biggest since August 2015.

Pound Hedging Is Pricey Even Before Brexit Risks Are Factored In
Vassilis Karamanis – Bloomberg
At first glance, the high cost of hedging pound weakness into year-end may seem linked to Brexit risks, but a closer look at options suggests otherwise. Nine-month sterling-dollar put contracts, which capture the Dec. 31 deadline for the U.K. and the European Union to agree on a trade deal, now cost around 260 basis points more than calls. That compares with the 2020 average of 150. Still, the pair’s so-called forward implied overnight volatility rates suggest the elevated pricing of put options has more to do with coronavirus-fueled risk upheavals than fears that Britain and EU will fail to reach a deal. That means hedging costs could climb more if the risk of a no-trade-deal Brexit increases.

Exchanges and Clearing

NYSE Options: Permanent Penny Interval Program for Options
On July 1, 2020, NYSE American Options and NYSE Arca Options will be adopting the Penny Interval Program for Options (the “Program”) on a permanent basis, following the expiration of the Penny Pilot (the “Pilot”). The Program will initially apply only to the 363 most actively traded multiply listed options classes as determined by the OCC during the six month period ending on April 30, 2020 (the “Top 363”). To be eligible for the Top 363, an issue must either be in the Pilot or trading under $200 at the close of June expiration.


Fintech firms predict coronavirus will speed up digitalization
Bennett Voyles –
Times of crisis have always tended to foster innovation and accelerate technological change. When it comes to the futures industry, coronavirus (COVID-19) looks like it will be a similar driver. Fintech executives believe the pandemic is speeding up a digitalization of trading systems that was already underway, as trading firms adopt more virtual tools that help them cope with the triple threat of high volume, extreme volatility, and the lockdown life.


Investors Are Terrified of Chinese Stocks. How to Profit From Their Fear.
Steven M. Sears – Barron’s
In less than two weeks, investors may learn more about China’s economy than at any other time since the coronavirus emerged from Wuhan to ravage the world economy.
The National People’s Congress is scheduled to meet May 22, and some investors are preparing for the possible release of economic stimulus measures during a gathering that typically lasts 10 days. China’s top legislative body was scheduled to meet March 5, but the coronavirus outbreak interfered with those plans.

Unsure Whether Stocks Are Too Expensive? Here’s How to Know.
Al Root – Barron’s
The Covid-19 pandemic has decimated 2020 earnings estimates for many companies, but the stock market is up by a third from its March lows. The combination of falling earnings and rising stock prices means S&P 500 valuations are approaching alarming levels. Determining whether that is a problem requires knowing a little bit about what Wall Street looks at when valuing stocks.
Every profession loves its acronyms. Wall Street is no different.


What the history of market crashes teaches us about the coronavirus crisis
Peter Oppenheimer – Financial Times
The longest equity bull market in US history came to a dramatic end as a result of the coronavirus crisis, just a few weeks short of its 11th birthday.
The sell-offs in equity indices that started in mid-February were swift, delivering the speediest fall by the benchmark S&P 500 index into a bear market — defined as a 20 per cent drop from a recent high — on record.

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