The Week that Was: February 14 to February 18

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

Last week (February 14 – February 18), headline-driven trading dominated as equity markets remained mostly in risk-off mode. The situation between Russia and Ukraine remained fluid. The inflation narrative has been stickier.

The week included a variety of hawkish comments from St. Louis Federal Reserve President James Bullard. In one interview, he advocated for a 100-basis point hike between March and July. By contrast, the minutes from the previous Federal Reserve meeting leaned dovish and by week’s end, the probability of a 50 basis-point tightening in March fell to approximately 20%, down from near 100%.

The economic data released last week was mixed. Weekly jobless claims increased, surprising the market. Nevertheless, the rebound in the labor markets over the past few years has been exceptional. Manufacturing data declined, also surprising the market. The Producer Price Index (PPI) data showed persistent inflation pressure. Retail sales data came in well above expectations, indicating a strong consumer.

Looking at year-to-date sector performance, Energy leads by an order of magnitude. Energy’s advance (+22.5%) is in part related to the current geopolitical risks. Financials are the only other sector in the green (+0.1%). The areas hit hardest in early 2022 include Real Estate (-13.8%) and Information Technology (-11.9%). Higher interest rates have weighed heavily on both.

Quick Bites

Indices

• U.S. Equity Indices continued to move lower last week with headline-driven trading. The risk associated with tensions between Russia and Ukraine continued to percolate.
• S&P 500 Index (SPX®): Declined 1.58% week-over-week after moving in a 3.7% range relative to the February 11 close. The SPX ended the week just above the lowest close of the year.
• Nasdaq 100 Index (NDX): Decreased 1.72% week-over-week. The NDX closed just over 14,000 and is right at 6-month lows. 
• Russell 2000 Index (RUT℠): Decreased 0.95% week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Increased 0.39 vols week-over-week. The VIX Index moved between 32.04 and 23.88 before closing at 27.75.

Options

• SPX options average daily volume (ADV) was 1.62 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,350 strike with a 2/25 expiration) implies a +/- range of about 2.7%.
• VIX options ADV was about 700,000 contracts last week, which was higher than the previous week’s ADV of 680,000 contracts. The VIX options call-put ratio was 1.5:1.
• RUT options ADV was 34,000 contracts, down from the previous week’s ADV of 44,000.

Across the Pond

• The Euro STOXX 50 Index decreased 0.25%.
• The MSCI EAFE Index (MXEA℠) decreased 1.70% and the MSCI Emerging Markets Index (MXEF℠) decreased 0.5% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index climbed fractionally last week and closed at 27.75.
• The February VIX futures contract expired on Wednesday, February 16, at 26.28. The term structure closed inverted.
• March is now the front (standard) VIX futures contract, making the March/April VIX futures spread the Month-1/Month-2 spread. The March/April VIX futures spread settled on Friday at March 0.95 over April. The March VIX futures contract gained 0.95 for the week and April was higher by 0.50.

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.24%, higher by one basis point week-over-week. The 10-year U.S. Treasury yield ranged between 2.06% and 1.92% and closed at 1.93%, which is down one basis point week-over-week. The 2-year U.S. Treasury yield fell by two basis points to 1.47%.
• The S&P GSCI was unchanged on the week. The commodity benchmark continues to measure near multi-year highs, but has stalled lately.
• WTI Crude Oil ended the week down 2.8%. Natural Gas led the Energies, advancing almost 13% last week. Gold traded over $1,900 for the first time since June 2021.
• Crude Oil reversed following news that the U.S. may lift some of the Iranian sanctions if the country complies with the Iran Nuclear deal. Iran is a significant global producer of crude oil.
• The Big Tech leaders all closed lower on the week. Meta (Facebook) was the laggard, falling 6.1% and closing just north of $200 per share.
• Tesla outperformed but closed down 0.4%.
• Alphabet (Google) announced its intent to limit the amount of personal information shared by its Android OS with advertisers. The move follows a similar announcement from Apple last year.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $44,600 and $39,900. BTC declined by 5.9% relative to the previous Friday.
• Bitcoin fell below $40,000 briefly last week.
• 30-day BTC realized volatility is approximately 72%.

Ethereum

• Ethereum (ETH) ranged between $3,200 and $2,770 last week. ETH fell 4.5% week-over-week and ended the week just off lows at $2,800.
• One-month ETH volatility is at 80%.

Coronavirus

• The 7-day average COVID-19 infection rate in the U.S. continues to decline. The average moved to approximately 112,000 on February 18, down from approximately 200,000 cases per day the week prior. Average daily COVID-19 infections are back at early December levels.
• 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 69% and 81% respectively.
• Hospitalization and death rates are also declining. For example, hospitals now have 30% fewer patients in intensive care units compared to early February.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Two years ago, the S&P 500 Index reached a new all-time high before declining 34% in just over one month. So much has changed over the past couple years. Despite the macroeconomic turmoil, the S&P 500 Index is now 34% higher relative to the February 19, 2020 close. Every S&P 500 Index sector is higher, led by Information Technology (+53%) and Materials (+45%). Real Estate (+16%) and Utilities (+1%) are the laggards. Where will the broad market be in two more years?

S&P 500 Index Sector Performance Since February 19, 2020

Source: S&P Dow Jones Research

• Bonds have sold off considerably to start 2022. In general, bond prices tend to be less volatile than alternative asset classes. Based on data from Compound Advisors, using the Bloomberg Barclays Aggregate Bond Index, it could be the worst year for bond (price) performance in at least four decades. Lower bond prices imply higher bond yields.  

Bloomberg Barclays Aggregate, Total Return

 Source: Compound Advisors/Charlie Bilello

• The national average for a gallon of regular unleaded gasoline in the U.S. is now $3.50. California has the highest average price at $4.70. Oklahoma has the lowest average at $3.15. Higher gas prices can lead to less discretionary spending and reduced consumer confidence. Brick and mortar retailers tend to suffer as do airlines, restaurants and potentially home values in exurbs. The highest recorded average price in U.S. history was $4.10 per gallon in July 2008.

National Average for Gasoline in the U.S.

Source: AAA Gas Prices

The Week Ahead

Data to be released this week: Case-Shiller Home Price Index (Year-over-Year), Markit Services and Manufacturing Purchasing Managers Index and Consumer Confidence Index on Tuesday; Initial Jobless Claims, Gross Domestic Product (GDP) Revision and New Home Sales on Thursday; Income and Spending, Personal Consumption Expenditures (PCE)/Core Inflation Index, University of Michigan Consumer Sentiment and Five-Year Inflation Expectations on Friday.

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