A big week for Bonds, Equities and Volatility: a trio confirming less fear

Ed Mertiri |

The S&P 500® bounced back strongly last week, gaining 6% to leave it no longer “corrected”. It is now at mid-February levels, before the Ukraine invasion officially commenced. The next key level to break through is 4600, the February rebound high. S&P 500’s 6% advance was not only the largest weekly gain in 2022, but also the largest absolute weekly move so far this year. The rebound is largely attributed to Jerome Powell’s remarks at the FOMC press conference. While some may interpret them as “hawkish”, they included firm projections for the strength of the U.S. economy.

Energy was the sole sector to end the week in the red, down 4%. Not surprising given that Brent Crude oil closed slightly down for the week. Adding downward pressure on oil for this week is Saudi Arabia’s Aramco announcement of plans to increase its oil and gas output.

The FOMC removed some uncertainty around interest rates this year. Even if there is criticism around the Fed’s stated pace and oath of interest rate increases, investors at least like to have a little less uncertainty in the coming year. It has been a difficult month for investors, facing uncertainty and fear from three major fronts: inflation, monetary policy, and Ukraine. For the past two years investors have usually only had to face one major fear at a time, alternating between COVID and inflation worries. Since mid-February bond, equity and the VIX were indicating the increasing and crushing fear. But the past week has three indications that we might be heading towards calmer waters. Stock prices were broadly up, bond price have been going down, meaning rates are going up, (see chart) and the VIX finally broke below 30, dropping sharply to close at 23.9 on Friday. While we may not be out of the woods just yet given the unsettling Ukraine invasion, the bond and futures markets have been indicating more risk taking.

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