Fed meeting, earnings line up ‘key week’ for stocks, strategist says

RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman joins Yahoo Finance Live to discuss the expectations for the upcoming FOMC meeting, volatility, tech earnings, supply and demand, and the outlook for cryptocurrency.

Video transcript

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AMY WU SILVERMAN: Welcome back to "Yahoo Finance Live," everyone. The upcoming Fed meeting combined with big tech earnings could trigger higher equity market volatility. That's according to our next guest here.

Let's welcome in RBC Capital Markets equity derivatives strategist Amy Wu Silverman. Amy, great to have you here with us this morning. Thanks for taking the time and kicking off this Monday with us. OK, so first and foremost, when we've got the combination of these two things, this intersection, setting up for a pretty big week here on the equity markets. What are you expecting perhaps foremost from the Fed?

AMY WU SILVERMAN: Yeah, look, so it's going to be a little comingled, right, because we also have earnings with the Fed. But I think the Fed is probably going to stick to what everyone expects for, 75 basis points. But, obviously, when it comes to Jerome Powell, it's almost always what happens in that news conference afterwards. And that can trigger volatility or not.

But I really think, as you mentioned, this is a key week, a really important week, both on the single stock side, and, obviously, as well as macro. So if we're going to see equity volatility, it should be coming this week.

- What sectors, Amy, do you feel as though if the Fed comes out here later this week and has that hawkish press conference, where do you see the volatility picking up?

AMY WU SILVERMAN: Yeah, it's a good question. I think megacap tech, your long-duration assets, those are always the ones that tend to be very sensitive. And, obviously, at the same time, if they're also reporting any sort of idiosyncratic news, I think you're going to get volatility really focused on that.

And I think what's important about that is those also tend to be the sectors that are heavyweights in the index themselves. So a lot of time when we think about what bleeds equity volatility to the index levels, it's what happens to those sectors that are huge megacaps weights in the indexes.

- And so talking of technology and that huge mega-cap weight in the indexes, you just heard us perhaps a few minutes ago talking about how lame the outlook is for a lot of large-cap tech for this earnings season, particularly when it comes to revenue growth. So is that going to be a bummer for the markets? Or do you think the bar is so low that maybe they'll come out here and beat?

AMY WU SILVERMAN: Yeah, it's really fascinating and tricky right now, because if you look to the derivatives markets, the options sentiment for all these big-cap stocks with the exception of Apple is actually very bullish. So you're not seeing a lot of hedging. You're not seeing a lot of demand for downside.

Again, the only exception to that is Apple, where we're actually seeing quite the opposite, quite bearish sentiment. But overall, so if you take Qs, or you take XLK or you take everything that's reporting this week, it's all lining up with bullish sentiment. And sometimes that doesn't necessarily mean people think there's upside. It's simply a lack of downside from here.

- Do you believe that if we were to see a concerted move back into any of the tech names one way or the other post earnings that for even the crypto space, which I know you track closely as well, that could also see some sort of rising tide as well, along with tech?

AMY WU SILVERMAN: I do. It's interesting. We did a client call last week with Sam Bankman-Fried. And one of the discussions that we had in crypto is just what's been happening with correlation, because right now crypto and Bitcoin has been very correlated to just macro, to Fed, to what's been happening with all this accommodation being removed. But what you're seeing is there's this extrinsic correlation, because the people who tend to buy crypto are also the same people who tend to buy your long-duration assets. And so reflating one can also reflate the other.

- Amy, we're starting to see some really big sell-offs in some tech names, just staying on the tech theme. So you had Snap shares crash close to 40% on Friday. I'm looking at Squarespace out with a let-down on the earnings front this morning. Its stock is down 10%. What are investors not factoring in right now? Because clearly they're missing the boat on something.

AMY WU SILVERMAN: Yeah, there are a couple of fundamental things. Obviously, one of them could just be effects. It's like we know what's been happening with euro-dollar, but there tends to be this estimate lag that we do see in modeling that in on the Street. So I think that's part of it.

And then the second part of it is you don't quite get a good sense of how badly supply chain is until those calls. We saw that on the consumer side with Walmart and Target.

And then the third thing I'll just say on that is it's really interesting because the options market has been pretty crappy, to be totally honest with you, with pricing these implied moves the last two quarters, ever since we crawled our way out of the pandemic. So last quarter Netflix was implying an 11% move and it moved down 35% that day. Snap I think was implying maybe an 18% move and it just doubled down that in terms of moves. And so I'm really interested to see that these implied moves that are being priced for this week, how accurate they are because, the options market has not been good about doing those implied moves accurately.

- Amy, why that? Is it just because it's, obviously, humans making these trades, and the humans haven't been as good about predicting what these stocks are going to do?

AMY WU SILVERMAN: Yeah, it's a good question. I think part of it is yes, that's certainly part of it. But the second part is there are these artificial dampening effects on supply and demand right now.

One of them is when you have a market where a lot of people are just out of the market, the degrossed and derisked, I would say get a very skewed view of volatility due to that, because again, if you look to the rates market, volatility is extremely high. And we've seen that lag compared to equity volatility for a long time. People are just asking, why is VIX not catching up to what we feel and effects and rates?

Part of it is that people took their ball and went home. And so that supply-demand dynamic is one that is not accurately being portrayed right now. But look, I think that's opportunity, right? That's opportunity to own volatility if these things get priced really, really incorrectly.

- Amy Wu Silverman, RBC Capital Markets equity derivatives strategist, always good to see you. Talk to you soon.