The Week That Was: February 28 to March 4

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

Last week (February 28 – March 4), economic data was mixed. The monthly jobs number came in well above estimates, up 678,000 compared to the expected 400,000. ISM Manufacturing and Services data showed slower growth. This week’s Consumer Price Index (CPI) data will be closely watched. The broad market was lower for much of the week, but remained at least 2.3% above late February lows.

The situation in Ukraine helped push U.S. interest rates lower across the term. Federal Reserve Chair Jerome Powell testified before Congress and indicated his tacit support for a quarter basis point hike at the March Federal Open Market Committee (FOMC) meeting. Powell also said it is too early to say whether the geopolitical backdrop could slow the expected pace of future hikes.

Crude Oil prices are up more than 50% year-to-date. Last week, Brent and WTI Crude Oil, as well as gasoline futures, traded to multi-year highs. Oil has gained  approximately 80% since December 2021. Historically, oil shocks have been followed by recession (1973, 1990, 2000 and 2008). The consistent narrowing of the 10-year/2-year bond spread also hints at slower or negative future growth.

Shifting to weekly sector performance, Energy led the charge, gaining 8.3%. Utilities also added 4.4% as the market traded with a decidedly risk-off tone. Health Care and Industrials were slightly positive. Financials declined 5.5% for the week. Technology lost 3.3%. In aggregate, the S&P 500 Index lost 1.27% during another very volatile week. 

Volatility tends to cluster, which is precisely what has transpired in capital markets over the past few weeks. Since early February, both realized and implied volatility levels have climbed for the S&P 500 Index. The VIX Index made new 52-week closing highs in early March.

Quick Bites

Indices

• U.S. Equity Indices all closed lower for the week as funds flowed to perceived safety. Bonds were higher and the U.S. Dollar Index gained as the war in Ukraine escalated.
• S&P 500 Index (SPX®): Decreased 1.27% week-over-week after moving in a 3.1% range relative to the February 25 close.
• Nasdaq 100 Index (NDX): Decreased 2.5% week-over-week, the lowest weekly NDX close since early June 2021.
• Russell 2000 Index (RUT℠): Decreased 1.96% week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Increased 4.40 vols week-over-week. The VIX Index moved between 35.19 and 28.43 before closing at 31.98. The VIX Index established new 1-year closing highs on March 1. 

Options

• SPX options average daily volume (ADV) was 1.5 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,385 strike with a 3/11 expiration) implies a +/- range of about 3.44%.
• VIX options ADV was about 560,000 contracts last week, which was higher than the previous week’s ADV of 475,000 contracts. The VIX options call-put ratio was 1.7:1.
• RUT options ADV was 36,500 contracts, down from the previous week’s ADV of 50,500.

Across the Pond

• The Euro STOXX 50 Index decreased 13.0%.
• The MSCI EAFE Index (MXEA℠) decreased 3.3% and the MSCI Emerging Markets Index (MXEF℠) decreased 2.5% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index closed at 1-year highs (33.32) on Monday, March 1. By week’s end, the VIX Index settled at 31.98, up 4.39 vols week-over-week. Volatility measures globally (realized and implied) have moved significantly higher over the past month.
• The VIX futures term structure remained backwardated. The VIX futures term structure has been inverted for 18 straight sessions on a closing basis, which is the longest persistent backwardation since March 2020.
• The March/April VIX futures spread closed at 1.30, with March over April. On February 28, that spread settled at 0.45 wide, so the inversion increased by 0.85 for the week.
• March VIX futures increased 4.25 and April climbed by 3.40 week-over-week.
•  The standard March VIX futures and options will expire next Wednesday, March 15. 

VIX Futures

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.17%, down 11 basis point week-over-week. The 10-year U.S. Treasury yield ranged from 1.92% to 1.68% and closed at 1.72%, lower by 27 basis point week-over-week. The 2-year U.S. Treasury yield fell seven basis points to 1.50%.
• The S&P GSCI gained 19.9% on the week. WTI and Brent Crude Oil moved higher. WTI ended the week up about $22 per barrel, a 25% increase, and Crude Oil prices are at 10-year highs.
• Gasoline futures are back at 2007 levels. Natural Gas prices added 10% in the U.S. Note, European energy markets have more direct exposure to Russia.
• Gold traded back to $1,975.
• Soft Red Winter Wheat May futures traded limit up four straight days, with expanded limits on the last two days. May wheat futures closed just below all-time highs. Ukraine and Russia account for about 35% of the global wheat trade and are significant players in the vegetable oil markets.
• Big Tech was mixed last week with Tesla outperforming. The company received approval to start producing vehicles at a $5.5 billion German facility.
• The other top tech names fell between 1% and 5%, with Amazon underperforming. Amazon announced its intent to close about 50 brick-and-mortar stores.
• Big picture, cyclical companies have underperformed relative to defensive stocks. That trend picked up velocity last week, but it’s been in place for most of 2022. Cyclicals are more sensitive to the overall economic environment.

Major Cryptos

Bitcoin

• Bitcoin (BTC) traded between $45,200 and $37,900 last week. Relative to the previous Friday, BTC was unchanged, trading around $39,400 on March 4. 
• BTC’s rally off the previous weeks’ lows was attributed, in part, to efforts from Russians and Ukrainians to move their fiat currency into something more transportable.  

Ethereum

• Ethereum (ETH) ranged between $3,000 and $2,600 last week. ETH ended the week at $2,600, down 4.2%.

Coronavirus

• COVID-19 cases continue to wane across the country. The 7-day average in the U.S. moved from approximately 77,000 cases per day last week to approximately 51,600 on March 4. 
• 65% of the U.S. population is fully vaccinated against COVID-19 and 76% received at least one dose of a COVID-19 vaccine. For just those 5 years and older, the numbers are 69% and 81%, respectively.
• Last week, New York City Mayor Eric Adams announced that the city is ending its vaccination requirements for restaurants, gyms and other venues and mask requirements will be lifted for all students ages 5 and above.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• The S&P 500 Index fell 12% between its January 3 closing highs (4,796.56) to its February 23 closing lows (4,225.50). Calendar year declines of that magnitude are typical. Looking back decades, the average decline during a year is around 16%. Recent years have been anomalous, with the exception of 2020. The S&P 500 did not suffer a peak-to-trough decline of more than 8% in 2017, 2019 or 2021. Drawdowns are difficult, but the current pullback is not unusual from a historical perspective.

S&P 500 Index Annual Returns and Maximum Intra-Year Drawdowns

Source: S&P Dow Jones Research

• Germany has the largest economy in the Eurozone, based on Gross Domestic Product (GDP). Germany is also very dependent on Russian oil and gas supplies. Despite significant investment in Green energy, sanctions against Russia may pressure the German economy. The DAX index, which tracks 40 of the largest German companies, has declined 20% from January highs. The DAX is now lower by 1%, relative to the beginning of 2020. By comparison, the S&P 500 Index has gained 34% over the same time frame.

DAX Index Performance

Source: Bloomberg

• Commodity prices, including Grain futures, have been rising since mid-2020. However, the advance in Corn, Wheat and Soybeans (oil) accelerated last week. Russia and Ukraine account for roughly a third of the global wheat supply. Ukraine’s Black Sea ports closed as a function of the Russian invasion. Over time, price will ration demand. In the interim, high food prices can lead to political unrest, particularly in developing countries.

Rise in Commodity Prices

Source: FactSet

The Week Ahead

Data to be released this week: Consumer Credit on Monday; Trade Deficit and Small Business Index on Tuesday; Job Openings/Quits on Wednesday; Initial Jobless Claims, Consumer Price Index (CPI) and Core CPI on Thursday; University of Michigan Consumer Sentiment and Five-Year Inflation Expectations on Friday.

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