The Week that Was

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

Last week (February 7 – February 11), inflation concerns were not assuaged when the January Consumer Price Index (CPI) data hit the tape. The CPI jumped 7.5% on an annualized basis and 0.6% on a monthly basis and is currently at levels last observed in February 1982. The Core CPI number, which strips out food and energy, is up 6.0% year-over-year. Fed Fund futures, which track very short-term rates, were volatile following the CPI data and comments from the St. Louis Federal Reserve Bank President James Bullard. He voiced support for a 50-basis point increase at the March Fed meeting and advocated for a 100 basis point move by July. As of Friday, the probability of a 50-basis point move is around 48%. The minutes from the last Federal Open Market Committee (FOMC) meeting will be released Wednesday. On the flip side, shipping costs have been falling over the past three months and delivery times have improved, which indicates that some of the supply-chain bottlenecks are easing.

Big picture, the small-cap Russell 2000 Index outperformed last week. The Russell 2000 Index was higher by about 1.7% in a week when mega-cap and tech companies sold off. The Nasdaq 100 lagged last week, declining by 3%. About 70% of the companies in the S&P 500 Index have reported quarterly earnings. Thus far, earnings growth stands at 27% for fourth-quarter 2021 and companies have largely managed to pass along higher costs to the consumer. In other words, margins remain strong.

On Friday afternoon, the market selloff was exacerbated by headlines about tensions between Russia and Ukraine. The National Security Council points to increasing “escalation with new forces at the Ukrainian border” and the prospect of an invasion in the next week.

Quick Bites

Indices

• U.S. Equity Indices treaded water Monday and Tuesday. Markets moved higher on Wednesday then reversed course later in the week.
• S&P 500 Index (SPX®): Moved in a 4.2% range relative to the February 4 close.
• Nasdaq 100 Index (NDX): Decreased 3% week-over-week. It was the lowest NDX weekly close since mid-June 2021.
• Russell 2000 Index (RUT℠): Increased 1.68%. week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Increased 4.5 vols week-over-week. The VIX Index moved between just below 31 and just below 20 before closing at 27.77.

Options

• SPX options average daily volume (ADV) was 1.56 million contracts per day. Friday was the most active session with more than 2 million SPX options trading for the first time since January 31. The one-week at-the-money (ATM) SPX options straddle (4,420 strike with a 2/18 expiration) implies a +/- range of about 2.7%.
• VIX options ADV was about 680,000 contracts last week, which was higher than the previous week’s ADV of 560,000 contracts. The VIX options call-put ratio was 1:1.
• RUT options ADV was 44,000 contracts, up from the previous week’s ADV of 40,000.

Across the Pond

• The Euro STOXX 50 Index decreased 1.8%.
• The MSCI EAFE Index (MXEA℠) increased 1.12% and the MSCI Emerging Markets Index (MXEF℠) increased 1.32% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index increased over 4 points as interest rates and percolating tension between the Ukraine and Russia pushed equities mostly lower. The VIX Index closed at 27.36 after measuring near 31 intraday Friday.  
• The VIX futures term structure closed the week inverted, again. The February/March (Month-1/Month-2) spread settled with the February VIX  futures 0.05 over the March VIX futures. By comparison, the previous Friday, that spread closed with March 0.90 over. The February VIX futures contract gained 3.05 on the week and the March VIX futures were higher by 2.1. 
• Standard February VIX futures and options will expire on Wednesday, February 16.
• The VIX futures term structure currently looks the same as it did the week ending January 28, with the back end slightly higher.

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.23%, higher by 2 basis points week-over-week. The 10-year U.S. Treasury yield ranged from 2.05% to 1.90% and closed at 1.92%, a 1 basis point jump week-over-week. The 2-year U.S. Treasury yield traded as high as 1.60% and ultimately ended the week at 1.49%, up 17 basis points week-over-week.
• The S&P GSCI was unchanged on the week. WTI Crude Oil traded up 1% to $93.80. Natural Gas futures fell more than 12% as forecasts call for warmer temperatures in the near future.  
• Lumber has been on a rip higher lately. Silver added 5% for the week and Corn and Wheat were both up more than 4.5%.
• The U.S. Dollar Index (DXY) strengthened following comments from James Bullard about the need to fight inflation. DXY ended the week on highs at 96. The Dollar Index is in the middle of its 3-month range.
• Big Tech is now beyond earnings and the Large Cap leaders all ended the week lower.
• Meta (Facebook) remains around $220, near the low end of its post-earnings lows.
• Apple announced its intent to launch a tap-to-pay feature that will permit businesses to accept Apple Pay and consumers to use an iPhone for contactless transactions.
• Tesla recalled about 26,000 cars over concerns about software that controls windshield defrosters in its cars.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $45,800 and $40,700. BTC rallied 4.6% relative to the previous Friday.
• Bitcoin remained above $40,000 all week. Cryptocurrencies climbed early in the week alongside equities and sold off following the prospect of a Russian invasion of Ukraine and Bullard’s interest rate comments.
• The 52-week lows for BTC  are around $30,000.

Ethereum

• Ethereum (ETH) ranged between $3,270 and $2,900 last week and ended the week just off lows at $2,900. ETH fell 1.7% week-over-week.
• The 52-week lows in ETH are around $1,000.

Coronavirus

• The 7-day average COVID-19 infection rate in the U.S. continued to decline last week. The average moved to approximately 200,000 on February 11 down from approximately 356,000 cases per day the week prior.
• 64% of the U.S. population is fully vaccinated against COVID-19 and 76% have received at least one dose of a COVID-19 vaccine. For just those 5 years and older, the numbers are 68% and 81% respectively.
• Pandemic restrictions are being eased in many parts of the U.S., as well as globally. Sentiment has been moving in favor of normalizing, with the expectation that coronavirus will be an endemic concern.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• The chart below plots the relative yields for the U.S. 10-year Treasury yield and U.S. 2-year Treasury yield since January 2020. For the past five months, the short-term rates have been moving up more quickly than longer-term rates. In other words, the U.S. Treasury yield curve is flattening. Historically, yield curve inversions, which occur when short-term rates exceed longer-term rates, foreshadow recessions. While the 10Y – 2Y is not currently inverted, the trend points in that direction. You can read more in the forthcoming version of Inside Volatility.

U.S. Treasury Yield Curve

Source: S&P Dow Jones Research + Bloomberg

• The growth in the electric vehicle (EV) market last year was significant. EVs are center stage at the annual Chicago Auto Show, which kicked off last week. Technology and consumer demand are driving adoption. Of all the cars sold last year (globally), 8.6% were EVs, compared to 4% in 2020. The VW Group, which includes Volkswagen, Skoda, Audi, Porsche, Bentley and Lamborghini, trails Tesla by 18.5% in terms of total EV sales. BYD is a Chinese automaker, and its sales are entirely in China. 

Growth in Electric Vehicle Sales

Source: Chartr & International Energy Agency

• Commodity futures markets all have a term structure that plots prices at different maturities. Well-supplied markets will remain in contango with near term futures trading below further-dated contracts. Contango is the prevalent term structure. When demand outstrips supply, or supply is constrained, the term structure can backwardate (invert). The current dynamic, where many supplies are constrained, and demand is elevated has pushed a record number of commodity markets into backwardation.

Number of Commodities in Simultaneous Backwardation

Source: SoberLook

The Week Ahead

• Data to be released this week: Producer Price Index (PPI) and Empire Manufacturing on Tuesday; Retail Sales, Industrial Production and Federal Open Market Committee (FOMC) Minutes on Wednesday; Initial Jobless Claims, Housing Starts and Philly Fed on Thursday; Leading Economic Indicators on Friday.

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