The Week that Was: July 26 to July 30

A concise weekly overview of the U.S. equities and derivatives markets

Last week (July 26 – July 30), corporate earnings, economic data and the Federal Reserve dominated headlines. The Federal Reserve has yet to indicate intentions to scale back asset purchases. However, there’s some concern priced into option markets around the Fed’s upcoming Jackson Hole Symposium (August 26-28), where some market participants are anticipating there may be a potential shift to “taper” talks. Meanwhile, the Goldman Sachs Financial Conditions Index indicates the most supportive environment in at least three decades. The preliminary look at second quarter U.S. gross domestic product (GDP) was +6.5%, which was shy of expectations (~8.5%), but ultimately the economy is ahead of pre-pandemic levels by many measures. Government spending slowed over the past three months and consumer spending was stronger than anticipated. The U.S. economy is no longer in recession, making the 2020 downturn one of the deepest, but also the shortest recessions in history. On the earnings front, 87% of the companies in the S&P 500 that reported second quarter earnings thus far have exceeded consensus estimates. Online advertising, cloud storage and smartphone technology continue to grow, and forward earnings estimates have been shifted significantly higher.

Quick Bites

Indices

• U.S. Equity Indices were relatively calm last week.
• S&P 500 Index (SPX®): Declined 0.4% week-over-week.
• Nasdaq 100 Index (NDX): Decreased 1.04% week-over-week. 
• Russell 2000 Index (RUT℠): Increased 0.88% last week.
• Cboe Volatility Index™ (VIX™ Index): Moved between 20.44 and 17.19 last week and closed at 18.24, up 1.04 vols, compared to the previous week.

Options

• SPX options average daily volume (ADV) was about 1.08 million contracts, which is lower than the previous week’s ADV of approximately 1.42 million. The one-week at-the-money (ATM) SPX options straddle (4400 strike with an 8/6 expiration) settled at around 52.5, which implies a +/- range of about 1.2%. The weekly ATM straddle settled on a 10.8% implied volatility.
• VIX options ADV was about 260,000 contracts last week, well below the previous week’s ADV of 660,000 contracts. VIX options call volume ran 1.71 for every 1 put.
• RUT options ADV was 45,100 contracts, a decrease from the previous week. The 1-week ATM straddle implies a range of 2.5% ahead of the 8/6 weekly expiry.

Across the Pond

• The Euro STOXX 50 Index gained 0.43% on the week.
• The MSCI EAFE Index (MXEA℠) increased 0.53% week-over-week and the MSCI Emerging Markets Index (MXEF℠) decreased 2.4% week-over-week.  

Charting It Out

Observations on VIX futures term structure

• The VIX Futures curve shifted slightly higher last week. Overall, it was a light week in the volatility markets with earnings taking center stage.
• The August VIX futures contract fell by 0.20 while the September VIX futures moved up 0.30 week-over-week. The Month-1 versus Month-2 spread settled at 1.80 wide, compared to 1.30 the previous week.

Source: LiveVol Pro

Macro Movers

• The U.S. 10-year Treasury yield traded in a wide range last week, measuring between 1.3% on Monday and 1.22% on Friday, before closing  the week six basis points lower at 1.23%.
• The S&P GSCI increased 1.7% last week with Coffee futures leading the charge. A drought followed by two serious frosts in Brazil’s primary growing area is to blame.
• The U.S. Dollar index was unchanged.
• Big Tech companies all posted second quarter earnings results last week and performance was mixed. Amazon disappointed on its report and fell 9.2% on the week. Facebook lost about 4%. Apple and Microsoft declined by less than 2%.
• Google and Tesla were higher by 1.4% and 6.8% respectively. Google’s market cap is now higher than Amazon’s.

Major Cryptos

• The price of Bitcoin (BTC) jumped higher on Monday morning (U.S. time). The bullish movement is attributed to short covering and headlines about Amazon looking to hire a digital currency and blockchain product lead.   
• As of Friday (July 30) afternoon BTC was trading around $40,200, up 24% relative to the previous Friday.
• Ethereum (ETH) also moved higher on the week, gaining approximately 19%. ETH was trading approximately $2,400 on July 30. The week prior, the price of ETH was around $2,100.
• On Tuesday, Treasury Secretary Janet Yellen and Senator Elizabeth Warren pushed for more oversight of cryptocurrencies. Thus far, U.S. regulators have been slow to address decentralized currencies.

Coronavirus

• The 7-day average infection rate rose from approximately 45,000 a week ago to approximately 71,000 as of July 30.
• Infection rates in Louisiana, Alabama and Mississippi are all up 250% or more over the last two weeks. 
• 49% of the U.S. population is fully vaccinated and 57% have received at least one dose of a COVID-19 vaccine. For those 18 years and older, the numbers are 60% and 69%, respectively.
• Globally, the 7-day average moved from approximately 530,000 to approximately 570,000.

Source: The New York Times

Tidbits from the News

• Nominal interest rates do not factor into inflation. The nominal U.S. 10 -year Treasury Yield is approximately 1.27%. The X-axis in the chart below plots year-over-year Consumer Price Index(CPI), which is an inflation proxy. The Y-axis shows the yield on the U.S. 10-year Treasury. The combination of interest rates at/near historic lows and a high CPI reading is very unusual. The most recent Bureau of Labor Statistic data on the CPI showed a year-over-year jump of 5.4% (the highest increase since August 2008). In January the change in CPI was +1.4% year-over-year. A significant portion of the current reading has been driven by used cars and energy prices increasing. Nevertheless, the combination is unusual. Going forward, will interest rates rise or will CPI decline?

Source: Macro Risk Advisors/Bureau of Labor Statistics

• The SPX options market is pricing in the potential for greater volatility around this year’s Federal Reserve Symposium in Jackson Hole, Wyoming (August 26-28). The SPX volatility surface indicates more uncertainty, ostensibly connected to the annual Fed meeting and the impact it could have on interest rates and equities. Will the Fed signal its intent to “taper” asset purchases in late August?

Source: LiveVol Pro

The Week Ahead

• Data to be released this week: ISM Manufacturing Purchasing Managers Index and Construction Spending on Monday; Factory Orders and Motor Vehicle Sales on Tuesday; ADP Employment and ISM Services Index on Wednesday; Weekly Jobless Claims and Trade Deficit on Thursday; Non-farm Payrolls, Unemployment Rate and Consumer Credit on Friday.

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