The Week that Was: June 14 to June 18

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

Last week (June 14 – June 18), the inflation narrative remained front and center and markets were more volatile than they have been in recent weeks. Despite the larger swings, the S&P 500 Index is just 2% off all-time highs. There hasn’t been a 5% drawdown in the broad market since late October 2020 (just prior to the U.S. elections). The Fed increased its 2021 inflation expectations up from 2.4% to 3.4% and anticipates inflation to be near 2.1% in 2022. The Fed made no explicit mention of its intent to taper asset purchases and moved its forecast for the next rate hike forward to 2023, which is still well in the future. To some extent, these events resemble the “Taper Tantrum” period in 2013 that resulted in an approximately 6% pullback over the course of a month.

Quick Bites

Indices

• U.S. Equity Indices mostly declined as investors grapple with the prospect of a more hawkish outlook on rates. The backdrop favored Big Tech at the expense of small-caps and the Dow Jones Industrial Average (DJIA) had its worst week in more than seven months.
• S&P 500 Index (SPX®): Declined by 1.9%, following the Federal Open Market Committee (FOMC) meeting and Quadruple Witching. The index measured in a wider 2.2% range relative to the previous Friday’s close. Forward-looking volatility measures shifted higher after establishing new pandemic-era lows.  
• Nasdaq 100 Index (NDX): Gained 0.35% last week as money moved back into “growth” stocks while long-term rates fell.
• Russell 2000 Index (RUT℠): Declined 4.4% last week and moved below its 50-day simple moving average (SMA).
• Cboe Volatility Index™ (VIX™ Index): Moved between 21.04 and 15.04 last week and closed at 20.64, the highest weekly close since March 19, 2021.

Options

• SPX options average daily volume (ADV) was about 1.48 million contracts, which was notably higher than the week prior. Expiration Friday accounted for 2 million options contracts out of the 7.4 million total traded. Last week was the second most active week for SPX options in six months. The one-week at-the-money SPX options straddle (4165 strike with a 6/25 expiration) settled at around 75 which implies a +/- range of about 1.8%.
• VIX options ADV was about 580,000 contracts last week, up from the previous week’s ADV of 540,000 contracts. VIX options calls and puts traded in equivalent volumes.
• RUT options volume increased week-over-week to an ADV of 48,300 contracts, compared to an ADV of about 40,000 contracts the previous week.

 Across the Pond

• The Euro STOXX 50 Index lost 3.2% on the week.
• The MSCI EAFE Index (MXEA℠) declined 2.3% week-over-week and the MSCI Emerging Markets Index (MXEF℠) decreased 1.6% week-over-week.  

Charting It Out

Observations on VIX futures term structure

• VIX futures gained across expiries. The July/August spread (current Month-1/Month-2) moved from 1.45 wide to 0.85 wide last week.
• The July futures moved higher by 2.65 while August gained 2.05. September and October futures traded up 1.65 and 1.30, respectively. The VIX futures curve is flatter but remains in contango.  
• June VIX futures and options expired on Wednesday, June 16, with a 17.10 print.
• The VIX Index climbed about five handles higher last week.

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The U.S. 10-year treasury yield moved between 1.59% and 1.44% following the FOMC press conference. The yield settled at 1.44% for the week. Relative to the previous Friday, the 10-year yield is down 1 basis point (bps).
• The short end of the yield curve moved meaningfully higher last week. The 2-year and 5-year yields popped while the long end (10-year and 30-year) fell. In other words, the yield curve flattened notably last week.
• The S&P GSCI lost 2.3% on the week. Copper futures moved another leg lower and are 15% off the highs from early May. Lumber continued its swoon. The grain complex has been volatile due in part to dry weather concerns across much of the U.S. growing regions. Energies (Crude Oil and Natural Gas) remain resilient.
• Friday, June 18, was the second largest notional expiry for single stock options ever, trailing only January 2021. Friday’s total OCC cleared volume of 49 million was the eighth busiest session ever.
• The Big Tech companies were back in favor during the largely “risk-off” week. With all else being equal, the decline in rates arguably benefits the growth companies that make up Big Tech.
• Apple, Amazon, Microsoft and Tesla all traded higher last week.  Google outperformed in recent weeks but dipped slightly week-over-week. Facebook was essentially unchanged.
• FAANG stocks are back at previous highs. Perhaps funds are flowing back into the growth leaders that led the market for years until more recently.

Major Cryptos

• Bitcoin (BTC) traded slightly above $41,000 early in the week and declined late in the week. Relative to the previous Friday, Bitcoin values fell by about $1,500. The range as of late has been approximately $40,000 to $32,000.  
• Ethereum (ETH) is down roughly 7% week-over-week. The second largest cryptocurrency ranged between $2,600 and just below $2,200. As of Friday, June 18, ETH was worth $2,190 per token. 
• Elon Musk announced that Tesla will resume accepting Bitcoin when there is a confirmed commitment to clean energy use. Just one month ago, Musk said Tesla could not accept Bitcoin because of the environmental impact of crypto mining.

Coronavirus

• The daily vaccination rate in the U.S. is around 1 million, compared to the peak in mid-April of about 3.3 million. Most states and vaccine distribution locations have vaccines available with no wait.
• The 7-day average infection rates continue to fall.
• 44% of the U.S. population is fully vaccinated and 55% have received at least one dose of a COVID-19 vaccine.
• Global infection numbers fell to February levels. The U.S. announced plans to buy 500 million Pfizer vaccines to be distributed to 100 low-income countries.
• Efforts to investigate the origins of the pandemic have been increasing, which may increase tensions between the U.S. and China.     

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Ad spending is likely to bounce back robustly this year. Group M forecasts a nearly 15% jump in advertising, as a function of mostly digital spend on streaming platforms. Last year the top five recipients of advertising dollars were Google, Facebook, Amazon, Alibaba and ByteDance, which combined accounted for 46% of the total spend. 10 years ago, the leaders were Google, Viacom, Disney, Fox News and Comcast, and they garnered 17% of the total spend.

Ex-Political Advertising Growth in the U.S.

Source: Group M

• The FOMC met last week and expressed some concern about potentially persistent inflation. Real interest rates factor in nominal rates (currently about 0.05% based on the 1-Year U.S. Treasury yield) and the inflation rate (currently about 5% based on a change in the Consumer Pricing Index (CPI)), which puts real rates at -4.95. The dot plot below shows the possibility of two hikes in 2023. Prior to this meeting, none were anticipated until 2024. 

Potential Interest Rate Changes

Source: Long Term Trends

• It appears that the year-over-year run in U.S. home prices has weighed heavily on potential home buyers. The average home price has moved significantly higher over the past year and the annual rate of change is in line with the housing market moves seen in 2005 and 2006. In short, the demand side of the home buying equation has fallen dramatically in 2021. Housing (and related businesses) account for about 15% of GDP.

University of Michigan Home Buying Conditions

Source: The Daily Shot

The Week Ahead

• Data to be released this week: Existing Home Sales on Tuesday; Purchasing Managers Index (PMI) and New Home Sales on Wednesday; Weekly Jobless Claims, Durable Goods and Gross Domestic Product (GDP) Revision on Thursday; Income/Spending, Core Personal Consumption Expenditures (PCE) and University of Michigan Consumer Sentiment Index on Friday.

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