Volatility in the US Risk-limited alpha in a “collared” market: SPX ITM KO puts US equities vulnerable...to a summer range-trade The Federal Reserve last week appeared more emboldened to normalize monetary policy, not only raising interest rates by 25bps but also reiterating its intention to hike four more times by the end of 2018 and stating that it “expects to begin implementing a balance sheet normalization program this year” - all despite recent softness in inflation data. Breakeven rates of inflation narrowed following the Fed communications due to tighter monetary conditions in the face of slowing US economic data, and risk asset bears responded in force, suggesting that Janet Yellen had “broken up” with investors and that it would be prudent to sell “before it’s too late”. We agree that the changing reaction function of the Fed is likely not supportive of further substantial US equity upside and may be viewed as the Fed now providing a short call option on the S&P 500. However, in our view, it is premature to conclude from last week’s developments that the “Yellen put” is dead. We see its strike as declining but would not underestimate Yellen’s dovish inclinations in a shock or the capacity for the Fed to still remain credibly on hold as long as the US economy is not “running hot”. In short, we see monetary policy as now providing a “collar” (long put / short call} ona US equity market that has already shown a propensity over the past year for getting trapped in record tight trading ranges.' Other factors may also conspire to create a summer range-trade for US equities, namely (i) fiscal policy, where gridlock likely caps equity upside but lingering policy hope floors the downside, and (ii) positioning, where the risk of continued “fragility events” (potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-up investors still accustomed to buying dips. Tug of war between fragile market/stretched positioning and cashed-up dip-buyers A