TRADING THE WEEK: Back to Basics

Finally, back to market basics.

The trading markets went back to trading on the economic basics rather than on tweets, Presidential soundbites and pictures, and politics. Just when the markets looked ready to plummet lower along came President Trumps first overseas trip last week. The trip to the Middle East and Europe came at the perfect time as it took market focus off of the administrations follies and back on the economic fundamentals.

The FOMC minutes from the May 2-3 meeting on Wednesday showed that the central bank seems to be on pace for a June 14 rate hike. Larry Peruzzi, Managing Director International Trading at Mischler Financial Group told Traders Magazine that the Fed dismissed 1Q slower growth and felt that higher broader growth is on the horizon. While the probability a June hike slightly diminished after the minutes release by weeks end markets had priced in a 92% chance of a 25 bps hike. [IMGAP(1)]

Confirming this, last weeks FOMC minutes were released and Federal Reserve members said they will need to soon start moving interest rates higher again, as well as allow certain securities to mature. By allowing securities to mature, the Federal Reserve doesnt have to sell off its balance sheet which has the same impact as tightening the money supply or raising interest rates. In fact, market pros expect the FOMC to vote to raise interest rates at its June 13 -14 two-day meeting.

But until then, Peruzzi said basic economic fundamentals rule the markets.

The week also saw some retailing firms release earnings and on a whole traditional retailers continue to lose market share but investors were encouraged by pockets of strength in a few names such as Best Buy, Home Depot and of course Amazon, Peruzzi added. Crude oils two-week rally rolled over as OPECs production cuts were seen as being insufficient. Last Saturdays news that The United States sealed a multibillion arms deal with Saudi Arabia helped lift defense stocks such as Lockheed Martin, General Dynamics and Boeing to all-time highs.

But aside from the aforementioned market positives there were negatives as well. ISISs attack on a concert in Manchester, England and President Trump gave the market a few awkward moments at the NATO meeting on Thursday. But as Peruzzi noted, neither was enough to keep the S&P 500 and NASDAQ from hitting new all-time highs.

We continue to see institutional money flow into the market but we also saw an uptick in retail flows entering the market, he reported. Overseas the U.K pound hit monthly low versus the Euro and U.S dollar on uncertain election polling numbers and Brazils bribery/ Presidential drama continues to amaze us.

Looking ahead this week there is a fair amount of data that will be compressed into the holiday- shortened week such as April Personal Income and the May Conference Board consumer confidence. As the week progresses so do the releases as Chicago PMI and ISM manufacturing data on Thursday will shed some light on manufacturing activity and health.

The highlight of the week will be on Friday with the release of Mays employment report, Peruzzi said. The Fed has repeatedly stated that the largest factor in determining future rate hikes is the payroll number. With the long weekend and the Jobs report on Friday providing we do not see any major news out of Washington volumes will be skewed to the end of the week.

Trading this week reflected the pre-holiday malaise and traders sell in May and then go away mentality, as volume plummeted to 6.33 billion shares from the week prior when volume was a more robust 7.12 billion shares, according to Bats Global Markets.

Mischler also examined total U.S exchange volume versus the VIX index and it confirmed Peruzzis beliefs that spikes in the VIX (May 15 to May 18) provided more trading opportunities as limits and stops were triggered and consequently trading volumes spiked. But last week the VIX has dropped back below 10 and trading volumes dropped by approximately 15%. Thus, volatility is indeed driving trading volumes.

Investors seem to be locked in on a June 14th hike so we expect little new data from the Fed until then, Peruzzi said. With the mid-month sell-off followed by the late month recovery, investors have had to digest a lot of data points in trying to determine if we are under or overvalued.

In other market news, off-exchange market share decreased 0.5 percentage points month-over-month to 36.8% from 37.3%, according to a recent report from Tabb Group. The market consultancy reported ATS/SDP volume decreased 4% MoM. TABB-reported ATS/SDP volume accounted for 29% of total off-exchange volume in April 2017.

Also, chief executive officer of Convergex, Eric Noll, is leaving the firm. Traders Magazine confirmed with the New York-based agency brokerage and technology company that Noll, who had overseen the acquisition of his firm to Cowen & Co, will be leaving the firm when the deal closes, which could be as soon as next week.

Despite leaving Convergex, Noll reportedly will continue to be a force within the equities market as Traders Magazine learned that he will remain a member and participant of the Securities and Exchange Commissions Equity Market Structure Advisory Committee.

Lastly, Wolverine Execution Services (WEX), a provider of technology and execution services to the buy-side, announced today the launch of Request For Quote (RFQ). This new functionality, within the WEX Trading Platform (WTP), provides a simple and fully electronic workflow, which will mirror the traditional high-touch trading experience.

And, according to Joseph Sacchetti, Partner at Wolverine Execution Services, shorten the traditionally long and potentially error-prone process down to a simple and shorter electronic process.

Clients wanted a compliant, electronic audit trail from the initiation of the quote to the final execution in an electronic format that would emulate their current voice quoting/trading experience. This will allow liquidity providers to enhance their high touch service, while still providing the full transparency that their clients demand.

This Weeks U.S. Economic Indicators of Interest: