The Week that Was: March 14 to March 18
A concise weekly overview of the U.S. equities and derivatives markets
Last week (March 14 – March 18), global equity markets moved higher as commodity prices retreated. Overseas markets outpaced U.S./domestic performance and the S&P 500 Index is now above where it was before Russia invaded Ukraine. In terms of S&P 500 Index sector performance, Technology, Materials, Health Care and Financials led. Utilities and Real Estate lagged, but still posted gains, which is more emblematic of a risk-on market.
The VIX Index fell below 30 (closing basis) for the first time since February 25. According to S&P Dow Jones research, historically, when the VIX Index falls below 30, the broad market is higher six to twelve months later 82% and 88% of the time (respectively). Median positive performance is +13.5% (six months) and +22.8% (12 months). However, there are a handful of historical situations where the S&P 500 Index was significantly lower after six to 12 months.
The Federal Reserve increased the Fed Funds rate for the first time since late 2018. The futures market is currently pricing in six more 25-basis point moves during 2022. The perceived clarity on the path for monetary policy, as well as tepid negotiations toward a settlement in Ukraine, bolstered equities. Thus far, Russia has not defaulted on debt, which was another market analgesic. The debt is dollar-denominated and the capacity for Russia to tap dollar reserves is seriously constrained by sanctions. Russia paid approximately $117 million in interest payments, but the country’s ability to service future debt payments remains murky.
Shifting to economic data, retail sales came in below forecasts. Producer Price Index (PPI) measures fell in February, which may signal slowing inflationary pressures. Continuing claims for unemployment insurance fell to five-decade lows as labor markets remain strong. Treasury yields shifted higher across the curve. Two-year rates have skyrocketed over the past three months. The average 30-year mortgage rate (4.16%) moved to the highest level in nearly three years.
- U.S. Equity Indices finished the week significantly higher. It was the strongest performance for U.S. equity markets since just after the 2020 U.S. elections.
- S&P 500 Index (SPX®): Increased 6.2% week-over-week after moving in a 7.2% range relative to the March 11 close.
- Nasdaq 100 Index (NDX): Increased 8.4% week-over-week.
- Russell 2000 Index (RUT℠): Increased 5.2% week-over-week.
- Cboe Volatility Index™ (VIX™ Index): Decreased nearly 7 handles week-over-week and closed at 23.87 – the lowest level since February 9.
- SPX options average daily volume (ADV) was 1.68 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,465 strike with a 3/25 expiration) implies a +/- range of about 2.13%.
- VIX options ADV was about 680,000 contracts last week, higher than the previous week’s ADV of 560,000. The VIX options call-put ratio was 1.43:1.
- RUT options ADV was around 52,000 contracts, higher than the previous week’s ADV of 36,600 contracts.
Across the Pond
- The Euro STOXX 50 Index increased 8.6%.
- The MSCI EAFE Index (MXEA℠) increased 6% week-over-week and the MSCI Emerging Markets Index (MXEF℠) increased 12.7% week-over-week.
Charting It Out
- The VIX Index ranged between 33.83 and 23.85 last week and closed fractionally above the weekly lows.
- The March VIX futures contract expired on Tuesday, March 15, (at 31.85) because standard April SPX options expire on Thursday, April 14, ahead of the Good Friday holiday.
- The VIX futures term structure ended the longest stretch of backwardation since February/March 2020 and returned to contango on Wednesday, March 16 – two years to the date from the index’s all-time closing highs of 82.69.
- The April/May VIX futures spread is now the Month-1/Month-2 spread.
- The Month-1/Month-2 relationship moved from April 0.50 over on March 11 to April 0.40 under on March 18. In other words, the spread narrowed by 0.90 last week.
VIX Futures Term Structure
Source: LiveVol Pro
- The 30-year U.S. Treasury yield closed at 2.41%, up six basis points week-over-week. The 10-year U.S. Treasury yield remained above 2% all week. Monday’s lows were 2.07% and highs were 2.25% immediately after the Federal Open Market Committee (FOMC) announcement. The 10-year U.S. Treasury yield closed at 2.15%, higher by 15 basis points week-over-week. The 2-year U.S. Treasury yield climbed 19 basis points to 1.94% -- the highest 2-year yield since June 2019.
- The S&P GSCI fell 2% for the week. WTI and Brent Crude Oil continued lower with progress toward a new Iran Nuclear deal that could bring Persian Crude back into the U.S. and global markets. WTI ended the week down another $6 per barrel at $103.
- Most commodities sold off last week, which could start to ease forward inflation concerns.
- Big Tech market cap leaders all gained ground last week.
- Meta led the pack, climbing more than 15%. The stock still remains 33% below its pre-earnings price of $323 per share.
- Tesla shares rallied more than 13% on the week despite its announcement that it will increase prices across its models.
- Last week Bitcoin (BTC) traded between $42,100 and $37,500. BTC was trading at $42,100 on March 18, up 7.1% relative to the previous Friday.
- BTC has vacillated between $45,000 and $35,000 for the past month.
- In the next couple of weeks, the 19 millionth Bitcoin will be mined. Bitcoin’s total supply is limited at 21 million coins.
- Ethereum (ETH) ranged between $2,950 and $2,500 last week.
- ETH climbed 15.2% week-over-week and ended the week just below $3,000.
- COVID-19 infections in the U.S. continue to decline nationwide. The 7-day average moved to approximately 30,500 on March 18, down from approximately 35,800 per day the previous week.
- 65% of the U.S. population is fully vaccinated against COVID-19 and 77% have received at least one dose of a COVID-19 vaccine. For just those 5 years and older, the numbers are 69% and 82% respectively.
- Unfortunately, COVID-19 cases attributed to an Omicron subvariant (BA.2) are rising in Europe. Roughly 25% of current U.S. illnesses are BA.2 specific, but that could rise. The U.S. has typically been a couple weeks behind European COVID-19 trends. The new variant spreads rapidly but illnesses have not been more acute.
- Globally, COVID-19 infection averages continued higher. The surge in China has prompted lockdowns and cases in Germany are near record levels. \
COVID-19 Cases in the U.S.
Source: The New York Times
Tidbits from the News
- While past performance is not indicative of future results, the prospect of a recession in the next two years is increasing. Historically, significant increases in oil prices have precipitated recessions. Higher commodity prices push inflation measures up, which has been observed over the past 12 months. The Federal Reserve typically increases interest rates to fight inflation but higher rates tend to slow demand and reinforce an economic slowdown.
Difference Between Current Oil Price and Long-Term Trend
- Most commodities sold off last week, which could start to ease forward inflation concerns. The products that had the most significant gains have declined with similar velocity. The chart below illustrates percentage changes between February 24 and March 8 (blue). The orange bars denote changes since March 8. Energy and Wheat prices are now well below highs.
Changes in Commodities Prices
Source: S&P Global Research
The Week Ahead
Data to be released this week: Chicago Fed and Federal Reserve Chair Powell at National Association for Business Economics (NABE) on Monday; New Home Sales on Wednesday; Initial Jobless Claims, Durable Goods, Markit Purchasing Managers Index (PMI) on Thursday; University of Michigan Consumer Sentiment Index, 5-Year Inflation Expectations and Pending Home Sales on Friday.
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