More Stress and VIX Above 40 Before ‘Powell Put’ is Triggered – Wells Fargo

more-stress-and-vix-above-40-before-‘powell-put’-is-triggered-–-wells-fargo - Financial Markets Worldwide

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Stock Markets 35 minutes ago (Oct 05, 2022 08:56AM ET)

More Stress and VIX Above 40 Before © Reuters. More Stress and VIX Above 40 Before ‘Powell Put’ is Triggered – Wells Fargo

By Senad Karaahmetovic

Wells Fargo analysts have reiterated the firm’s view that 2023 will bring a recession, more Fed hawkishness, and lower EPS.

These factors, as well as growing tail risks (e.g., liquid credit markets, the limited chance of a Lehman/TARP event), could eventually “catalyze a spike.”

“Look for a 40 handle. A VIX > 40 has historically coincided with SPX -4% (average 1-day) and helped trigger the “Powell Put”. In other words, the environment needs to get worse before a monetary policy pivot marks a longer-term buy-able equity bottom,” they wrote in a client note.

The analysts also noted that market volumes year-to-end are mirroring 2008.

“The frequency of SPX pullbacks (~200) and near decades-low ratio of downside vs. ATM vols (~1.3x) are reminiscent of Sep ’08. Instead of a liquidity crunch or systemic failure, today we envision the VIX catalyst to be monetary tightening that slows the economy, sinks earnings, weighs on confidence, and spurs short-selling,” they added.

The spike in volatility will likely come in the first half of the next year, delayed by the increase in expectations for a Fed pivot. As a result, the “Powell Put” may come into play but not at current levels.

“Markets will need to experience more stress before the “Powell Put” is triggered. We believe the Powell Put is “lower” now vs. pre-pandemic due to the Fed’s committed inflation battle. Equity risk (VIX >40) rather than levels (-24% YTD) may be a better indicator for when the Powell Put is “in-the-money”,” the analysts concluded.

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