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Fed minutes will be ‘crucial factor’ for investors: Strategist

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Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Steve Sosnick, Interactive Brokers Chief Strategist. Steve, always good to have you on the show. Wanted to start with the moves that we are seeing in bond yields there, Jared just highlighting that. But the 10-year plunging in the session, we're now looking at it yielding about 1.3% ahead of the Fed minutes coming up. What do you think is driving the moves right now?

STEVE SOSNICK: Good morning, Akiko. I think we have a few factors at work here. I think it's not coincidental that we're seeing a big move right ahead of the Fed minutes being released today at 2 o'clock. I think that's going to be one of those crucial factors that traders are waiting for. And the reason for that being I think some of it's been a short squeeze.

I've been asserting that the market got oversold at the end of the first quarter and investors-- bond investors were underinvested in 10 years. And then they raced back in, and I think a lot of people have been fighting the trade. It's a tough one, right? It's completely antithetical to the idea that there's going to be persistent inflation.

And I think that we have to find out today whether the idea that monetary-- which is the more important factor, monetary stimulus, a little inflation risk? Who outweighs what? And what's-- where are the winds blowing at the Fed? And I think ahead of this meeting, you're seeing-- that's where you're seeing the last little gasp of short covering ahead of it.

BRIAN CHEUNG: Hey, Steve. Brian Cheung here. It's great to have you on the show today. I want to ask about the volatility that you tend to see in the lead up to FOMC minutes. Right now, I'm looking at a VIX handle around 17. Obviously, nothing close to where we had those levels at the beginning of the year, but still a notch up compared to what we've seen over the last week or so, let's call it. So what type of volatility do you expect to see headed into those minutes at 2:00 PM, given the importance of what we saw as a policy shift in the Fed's June meeting?

STEVE SOSNICK: Well, Brian, I think we've seen some of the type of volatility. Today, with us opening stronger and selling off, I think markets have gotten thin ahead of the meeting. And yeah, 17, while it's relatively low compared to where we were earlier this year, we had a 14 handle at one point last week. So you could argue that the VIX has been picking up off its lows, but you could see from the chart that it's very much closer to the lows than the highs.

That points out a very interesting conundrum to me, and that is VIX was much higher when fiscal and monetary policy were much clearer. Throughout the length of, let's say, the last six months to a year, it's been fairly evident that the Fed was going to have its foot on the accelerator and that there was going to be fiscal stimulus in one form or another. And we've gotten a couple of packages, and we still may get the infrastructure package, which counts as fiscal stimulus.

But now you have this huge monetary uncertainty from the Fed. At the same time, the VIX is more or less near its lowest levels that it's seen since the pandemic at the time that the policy is the most cloudy. That's really quite a thing for the market to have to handle. That could set up for something being on the wrong foot if the market is disappointed.

AKIKO FUJITA: Steve, let's talk about another story we've been following over the last few days, which is the crackdown on these Chinese tech companies, DiDi obviously the very latest here. It feels like there is a regulatory squeeze happening on both ends over in China, obviously, trying to close that loophole of these companies that are listed abroad and then over in the US, calling for more transparency around these listings. As an investor, do you just stay away from these Chinese companies? Or do you think there's still an investment case given the growth potential within their business?

STEVE SOSNICK: I'm going to sort of split the needle a little bit, Akiko. I'm going to say that there is still an investment thesis for these Chinese companies, but I think investors in the US have to impart a bigger amount of risk premium to these companies. What does that mean? It means either paying less for them or having smaller holdings in them, which also doesn't help the price.

I think what's been demonstrated first with the Alibaba and now financial stories and now the DiDi story that the Chinese government has its own set of motivations which are not necessarily aligned with foreign shareholders. And we can argue whether or not DiDi was alerted to this, and that's a whole other animal, but it's clear that regardless of whether there was a heads up given or not, whatever the latest moves were from China, they were not particularly user friendly.

They're clearly very eager to keep a tight rein on data and the companies that generate data and store data. And to that end, I think US investors, it's very tough to have clarity as to what is in the minds of the Chinese regulators. And as a result, since they've shown that those moves are not particularly shareholder friendly, they're going to do what they're going to do regardless.

I think you have to be much more selective or much more price sensitive if you are investing in Chinese companies. It doesn't mean you shouldn't. The growth story is enormous. There's certainly upside in China, but I think it requires a lot more price and risk discipline than investors had been putting in prior. And that's why you see the price action that we're seeing.

BRIAN CHEUNG: Yeah, an interesting point there. It's not just about the regulators scaring companies that are trying to go public in the United States, but maybe even scaring the investors stateside and globally into Chinese stocks that even might be listed on US exchanges. But again, Steve Sosnick, Interactive Brokerage Chief Strategist, thanks for stopping by this morning.