Analysis-U.S. stocks may not be ready for hawkish Powell at Jackson Hole, options data show
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According to options strategists, people who invest their money might not fully understand how much the upcoming economic symposium at Jackson Hole, Wyoming, hosted by the Federal Reserve, could affect the market and cause unstable conditions. This lack of awareness could make them more susceptible to unexpected hawkish actions.
The cost associated with trading options, which is commonly used by investors as a protection against fluctuations in stock prices, indicates that there is an anticipation of a 0.9% change in the S&P 500 Index from the current moment until the end of trading on Friday. This is significant because it aligns with the timing of Fed Chair Jerome Powell's scheduled speech on monetary policies, set to occur at 10:05 a.m. ET (1405 GMT) on that same day.
Certain analysts argue that the perspective might not be sufficiently prudent, particularly if we refer to the previous year.
Powell's speech at Jackson Hole in August, which was more aggressive than anticipated, caused the S&P 500 to drop by 3.4% on the same day - marking the most significant response to a Federal Reserve chair's address at the yearly symposium in over a decade, according to Reuters analysis. During that period, options markets had predicted a movement of approximately 1.4%.
According to Steve Sosnick, the chief strategist at Interactive Brokers, investors who have made significant gains in stocks and are experiencing rising bond yields may find themselves unprepared if Federal Reserve Chairman Jerome Powell's hawkish stance prompts a sudden and rapid sell-off of high-risk assets.
Sosnick mentioned that the markets have managed to overcome a certain level of excessive comfort that was present around a month or two ago, however, they are far from being cautious when it comes to taking risks.
Researchers at Bank of America additionally think that the financial markets might not be adequately equipped for a tough stance from Powell, expressing earlier this week that the recent resilience in U.S. economic information would likely raise policymakers' apprehensions regarding a renewed surge in inflation.
The declining hopes of an economic downturn have redirected attention towards inflation and the possibility of a restrictive Federal Reserve. As a result, assets with higher risk are exhibiting greater indications of vulnerability compared to any other time this year. Consequently, we believe that stocks are more susceptible to a shock driven by macroeconomic factors than the market currently anticipates.
With the exception of the market decline in the previous year and the sudden drop in 2019, the speeches delivered by the Federal Reserve chairs at Jackson Hole have not had significant impacts on the market in recent times. On average, the S&P 500 has experienced a modest fluctuation of 0.9% on the day when these speeches are given, over the past ten years.
However, analysts believe that there is a possibility of more significant fluctuations in the market this time. Although the S&P 500 has experienced a 15% increase so far this year, the recent surge in Treasury yields has caused the stock market rally to stumble as investors may become less interested in stocks due to the attractive yields offered by Treasuries.
According to analysts at Bank of America, the Federal Reserve has made considerable advancements in reducing the prices of goods and services for consumers. However, there is a possibility that Powell, the chairperson of the Federal Reserve, may need to emphasize his belief in keeping rates elevated for an extended period of time. This is to ensure that people do not mistakenly assume that the fight against inflation has already been triumphed.
According to a study conducted by Barclays' specialists in derivative strategies, the current symposium coincides with a period where numerous types of investments have become increasingly susceptible to significant fluctuations subsequent to the Jackson Hole event.
According to the bank's strategists, the average volatility-adjusted movement in various financial markets during the 2017-2022 era has nearly doubled compared to the period of 2010-2016 at the event held in Jackson Hole. They mentioned this observation in a note on Tuesday.
Certainly, it cannot be guaranteed that Powell's statement will be overly aggressive. The fact that Treasury yields have risen to levels not seen in over ten years indicates that some investors may be understanding the Fed's message of prolonged interest rate hikes.
Meanwhile, there are indications that investors might not be completely caught off guard by unexpected market volatility. The Cboe Volatility Index, which evaluates the desire for safeguarding against market fluctuations, is currently at 16.15, a considerable distance from its previous low of 12.74 observed towards the end of July.
In my opinion, this event has been overly publicized and Powell will have significantly fewer personal grievances compared to last year, according to Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.
Written by Saqib Iqbal Ahmed, with editorial contributions from Ira Iosebashvili and Andrea Ricci.
