The Week that Was: March 21 to March 25

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

Last week (March 21 – March 25), the blistering pace of the previous week’s advance slowed, but U.S. equity markets were mostly higher. S&P 500 Index 10-day realized volatility fell to 21%, down from approximately 29 the week prior. The 9-day average true range for S&P 500 Index futures fell to approximately 75, down from well over 100 for much of the past month. In VIX options, more than 2 calls traded for every 1 put – the most call-skewed activity since the week ending September 17, 2021. Interestingly, the VIX Index closed that week at exactly 20.81, the same exact measure it closed at last week.

More broadly, the selloff in U.S. Treasuries continues. Interest rates have increased at a historic rate, particularly on the short end of the curve. For example, the 2-year U.S. Treasury yield was approximately 23 basis points in late September and is now 2.29%. As it stands, this could be the worst aggregate U.S. bond market performance in the modern era. The S&P 500 Bond Index is down 6.4% year-to-date. That may not sound significant, but the largest annual drawdown going back to 1977 was -2.92% in 1994. In other words, U.S. Treasuries don’t often move with this velocity. The selloff in fixed income isn’t happening in isolation, inflation has become a global concern.

The Federal Reserve has sharpened its rhetoric since raising short-term rates in mid-March. On Monday, Federal Reserve Chair Jerome Powell indicated that the central bank is open to larger incremental moves  to try to tame inflation.  Mortgage rates continue to climb into the spring selling season. Average 30-year mortgages are back at 4.42%. While long-term borrow rates remain low from a historical standpoint, they are now at three-year highs. Housing accounts for approximately 17% of U.S. Gross Domestic Product (GDP).

Economic data in the U.S. remains mixed. Durable goods orders declined 2.2%, the first decline in five months. New home sales fell 2.0% and pending home sales dipped 4.1% compared to expectations of a 1% advance. The University of Michigan Consumer Sentiment Index fell to the lowest level since 2011.

The only other corollaries occurred during recessions in 1975, 1980 and 2009.

On the plus side, manufacturing activity jumped much more than expected. Weekly jobless claims continue to fall and are now at the lowest levels since 1969. The labor market is strong. Finally, forward earnings estimates have been rising, driven in large part by Energies and Tech. On Friday, the Bureau of Labor Statistics will report Nonfarm Payrolls for March.

Quick Bites

Indices

• U.S. Equity Indices closed mostly higher with the small caps underperforming. The pace of the advance has slowed, and forward volatility levels are normalizing.  
• S&P 500 Index (SPX®): Increased 1.79% week-over-week after moving in a 2.7% range relative to the March 18 close.
• Nasdaq 100 Index (NDX): Increased 2.23% week-over-week, leading for the second consecutive week.
• Russell 2000 Index (RUT℠): Decreased 0.41% week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Decreased more than 3 handles week-over-week and closed at 20.81.

Options

• SPX options average daily volume (ADV) was 1.52 million contracts per day, compared to 1.68 million the previous week. The one-week at-the-money (ATM) SPX options straddle (4,545 strike with a 4/1 expiration) implies a +/- range of about 1.8%.
• VIX options ADV was about 520,000 contracts last week, higher than the previous week’s ADV of 680,000. The VIX options call-put ratio was 2.09:1 – the highest call-put ration since the week ending September 17, 2021.
• RUT options ADV was around 38,200 contracts, down from the previous week’s ADV of 52,000 contracts.

Across the Pond

• The Euro STOXX 50 Index decreased 1.4%.
• The MSCI EAFE Index (MXEA℠) was unchanged week-over-week and the MSCI Emerging Markets Index (MXEF℠) decreased nearly 8% week-over-week.

Charting It Out

• The VIX Index ranged between 25.36 and 20.81 last week. The VIX Index closed on lows for the second straight week, hitting the lowest weekly closing levels since January 14.
• The VIX futures term structure remained in contango and the curve steepened. The April/May VIX futures spread moved from 0.40 wide on March 18 to 1.40 wide on March 25.
• The April VIX futures contract declined by 2 handles and May lost 1 full point. The October VIX futures are the highest on the board, currently at a 26.60 settle. The markets expectations are arguably influenced by the U.S. mid-term elections in November.

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• Bond prices sold off hard last week across maturities. Federal Reserve Chair Jerome Powell and Federal Open Market Committee (FOMC) governors have signaled a greater willingness to raise interest rates in larger increments and reduce the Fed’s balance sheet.
• The 30-year U.S. Treasury yield closed at 2.6%, up 19 basis points week-over-week. The 10-year U.S. Treasury yield closed at 2.49%, up 34 basis points week-over-week. The 2-year U.S. Treasury yield climbed another 35 basis points to 2.29% -- the highest 2-year yield since May 2019.
• The S&P GSCI reversed course after a two-week decline. The GSCI advanced 7.7% and is back near multi-year highs. WTI and Brent Crude Oil jumped roughly 10% each. Natural Gas (Henry Hub – U.S.) rallied nearly 15%. The energy markets reacted to Putin’s threaten to end exports to Europe.
• Copper, Platinum and Palladium were slightly lower. Front-month Lumber futures fell almost 15% as that market continued to swing wildly.
• The leaders in Big Tech were up across the board once again. The trend has shifted, at least in the short term, despite the increasing possibility of 50 basis point hikes by the Federal Reserve.
• Investors have piled back into high beta and cyclical companies. Tesla added nearly 12% following news that its Berlin factory is operational. The plant was expected to open last summer. At full capacity, the new assembly plant is expected to produce 500,000 electric vehicles.
• Apple is only 4.4% off all-time highs. The largest company in terms of market cap announced its intent to sell iPhones as a subscription service. Apple hopes to roll out its hardware subscription in late 2022 or early 2023.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $45,100 and $40,500. BTC hit lows on Sunday and highs on Friday. BTC gained 6.3% week-over-week, relative to the previous Friday.
• BTC is back at the high end of its 2022 range. BTC finished last year just above $46,000.

Ethereum

• Ethereum (ETH) ranged between $3,200 and $2,800 last week. ETH trended higher throughout the week and climbed 5.6% week-over-week.

Coronavirus

• COVID-19 cases in the U.S. flatlined over the past week. The 7-day moving average continues to hover around 30,000. 
• 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 70% and 82% respectively.
• Some states in the northeast and south have seen upticks in caseloads. According to testing data and wastewater reports, the BA.2 variant of Omicron is becoming dominant.
• The global average caseload moved lower last week. China continues to struggle with the virus. Cases ticked higher in the UK, France, Germany and Italy.  

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Some Wall Street analysts, including Morgan Stanley’s research team, have drawn an analogy between the S&P 500 Index in 2018 and its current price action. The Federal Reserve started normalizing interest rates in 2018 following years of a “zero bound” on Fed Funds. In the Fall of 2018, the S&P 500 Index broke lower, eventually declining 19.8% on a closing basis. From peak to trough in 2022, the S&P 500 Index fell 14.6%. If the analogue holds, it points toward an S&P 500 Index bottom around 3,800.

S&P 500 Index in 2018 and 2022

*Past performance is not indicative of future results.

Source: Bloomberg/Morgan Stanley Research

• According to Goldman Sachs Derivatives research, the sharp decline in the VIX Index (VIX Index reference of 22.95) pushed the 1-month forward volatility measure below 1-month realized S&P 500 Index volatility. That’s unusual, with very few instances over the past three years (excluding late March – April 2020). In other words, the implied volatility (forward) risk premium has fallen to a point where hedges or SPX options might be considered cheap. In fairness, that assumes that S&P 500 Index realized volatility remains approximately 24%+.

One-Month Forward Volatility Measure Moves Below One-Month Realized S&P 500 Index Volatility

Source: Goldman Sachs Derivatives Research

• There is a correlation between energy prices and oil rig count as energy producers need prices to remain above breakeven costs for exploration, production, taxes, transport and sunk costs. The total rig count has increased more than 170% since August 2020 lows. As it stands, the count remains 20% below March 2020 levels.

5-Year Oil Rig Count

Source: Baker Hughes & YCharts

The Week Ahead

• Data to be released this week: Trade In Goods on Monday; Case Shiller Home Price Index and Consumer Confidence Index on Tuesday; ADP Employment  Report, Gross Domestic Product (GDP) Revision and Corporate Profits Year-over-Year on Wednesday; Initial Jobless Claims, Personal Income and Spending, Personal Consumption Expenditures (PCE), Chicago Purchasing Managers Index (PMI) on Thursday; Nonfarm Payrolls, ISM and Markit Manufacturing PMI, Construction Spending and Motor Vehicle Sales on Friday.

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