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Investors ‘are a little complacent’ amid volatility, strategist says

RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman joins Yahoo Finance Live to discuss the expectations for Wednesday’s FOMC meeting, volatility, market uncertainty, and recessionary risks.

Video Transcript


JULIE HYMAN: Amy Wu Silverman watch's volatility. You just mentioned the VIX. And I know that she was watching that and sent us some notes about that. "Volatility sellers have been out in full force," she said, "even as the VIX is around 25, 26," as we've been watching it.

And she also points out that FOMC, once we get past that, then we'll have the Jewish holidays so that we could see-- start to see a bit of a decline in volatility from these elevated levels where we have seen it as of late. So that's something to keep an eye on as well that we will, after this, maybe get a little bit more calm coming to the markets, at least until the earnings season kicks off in earnest. After this, the next Fed meeting isn't until November 2.


JULIE HYMAN: So we do get, once again, a little bit of a gap before that big catalyst.

BRAD SMITH: And also in November, midterm elections as well.

JULIE HYMAN: Yeah, that little thing.

BRAD SMITH: It's going to be interesting, the timing. Yes, all of that coinciding at once. I believe we have RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman back. Amy--

JULIE HYMAN: There she is.

BRAD SMITH: --I see you smiling, live in living color. So the feed is good. We are good. All right. So--

AMY WU SILVERMAN: I'm so sorry about that.

BRAD SMITH: That's-- that's all right. Technology happens, right, for better or for worse sometimes. So let's get your expectations going into the policy announcement later on today and what you're going to be listening for from Fed Chair Jay Powell.

AMY WU SILVERMAN: For sure. So, look, I think the expectations from our own rates strategists and from the Street right now is still for 75 basis points, even though, of course, those expectations of 100 have grown in proportion. So, obviously, for the Fed and for Jay Powell, it's about the future. And I think a lot of the crowd that had expect-- been expecting this lots of rates hikes and then cuts in 2023, that has declined somewhat.

And you really feel that, frankly, in the volatility. And you start to see that pick up pretty dramatically in September. You know, and my view has continued to be that this continues both through September and October in terms of both the pickup and the level of volatility that we will see.

JULIE HYMAN: Amy, what are you guys hearing from clients right now in terms of their level of nervousness around the Fed or level of confidence in the Fed to kind of steer us through here?

AMY WU SILVERMAN: It's been very interesting because volatility has misbehaved so much this year, Julie, that, actually, clients, frankly, are a little complacent. There's actually been a lot of volatility selling. And you're seeing these interesting dynamics, right, where on days when the S&P is down, the VIX is actually down, too, which is usually supposed to be an inverse relationship.

And you're also seeing clients come in when volatility is high and actually sell it because the reality is even with the drawdown that we saw in March, that is actually the strategy that has been working. And what concerns me about that is there are many tails that are still in the market. I only need to think about Russia and Ukraine to be reminded of these tails. And they're really being priced quite low, and they continue to be.

BRAD SMITH: And so what are you advising to clients right now? What particularly, even as you think through strategy not just for the rest of this year, but even into next year, given that we've already seen some companies who are trying to get a grip on exactly how deep a recession might impact them and what that may mean for their own forecasts?

AMY WU SILVERMAN: Yeah. It's a good question. And unfortunately, we've had to be very nimble and very nuanced. So there's kind of these textbook trades that make sense in different volatility environments and in different environments where skew, that demand for hedges, is placed in a certain way. But unfortunately, this year, they haven't worked.

So one thing we've said is, look, when hedges don't work, you have to be really tactical about it. So even into something like the FOMC, you have to be more short term. You have to do trades where you're doing some sort of spread. You're essentially not paying so much volatility. You're trying to cheapen it somehow.

And then you have to do some relative trades. And so, for instance, we look at the US versus Europe. We look at different sectors, maybe funding from a sector that has recently outperformed, like an energy sector, let's say, to fund protection in a different sector, so different ways to cheapen trades while ultimately still saying that we are looking for that downside protection.

JULIE HYMAN: What tends to happen during-- if we do end up getting a recession, what tends to happen with volatility during recessions, Amy?

AMY WU SILVERMAN: It's interesting because the first thing I did as we headed into the cycle is I looked through essentially 30 years of data to answer that question, and it's sort of unsatisfying. It's a very mixed bag. So part of it is-- kind of, like, 2/3 of the time, you get this volatility pick up. But one third of the time, you don't.

And then if you include the taper tantrum, which some people say should be included as part of looking at rate cycles, it actually increases a little bit. So most of the time, volatility picks up, but there are times when it doesn't. I think part of that has to do with expectations. And then outside of that, it also has to do with the level of volatility coming in. And remember, we had a decently high level of volatility coming in because of the pandemic.

BRAD SMITH: And then additionally here, Amy, I mean, we were trying to coincide all of the different macro events that are taking place going into even the next meeting, and whether that's moving through some holidays, whether that is also on the political front, an election, a midterm election cycle. You know, how does that all kind of coincide together? And what should traders be bracing for even later on once we get to that November Fed meeting?

AMY WU SILVERMAN: You know, it's interesting because geopolitical events tend to be very kind of gappy from a volatility perspective. Political events are not necessarily that way. So you'll see this pickup in volatility kind of heading into the midterms. But oftentimes, it's sort of-- you actually sell into those news once that occurs.

Now earnings, on the other hand, which kicks off in early October, is critical and-- especially as you head into the end of the year, and it's sort of the company's last time to kind of give key information, potentially give guidance for the new year. Those tend to be very volatile events. If you actually look on a month-on-month basis, October is really a critical event for volatility rising. And then, of course, outside of that there are these unknown unknowns, which the options market and the market in general has a very hard time pricing, like geopolitical events, which can always cause that gap and then reprice your tails very quickly.

BRAD SMITH: Wow. All right. Keeping an eye out for the unknown unknowns. We're just going forward best we can. RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman. Thanks so much for the time this morning.