TRADING THE WEEK: Brexit, Volatility and Fed Silence Market


Is it Wednesday yet?

That’s what traders and pundits were asking last week as a trio of factors contributed to keep trading muted. Trading the first full week of June was confined to Thursday and Friday, as the former arrived and saw the ECB leaving interest rates and asset purchase targets unchanged and omitting any forward guidance. Also, in the U.S, the Comey Senate testimony while dramatic, did not offer a smoking gun, and did little to affect markets. U.S. stocks ended Thursday little changed, while Treasuries fell and the dollar advanced as equity indices swung between gain and losses.

Larry Peruzzi, Mischler Financial

According to Larry Peruzzi, Managing Director and Head of International Trading at Mischler Financial reported that trading volumes returned to their ADV on Thursday after spending the first half of the week down about 15% from their ADV. Volatility, as measured by the VIX index, he added, inched higher up going into last Thursday, but by the end of the week was back below 10 to all-time lows.

Trading last week reflected the pre-FOMC/ low-volatility malaise as volume drifted lower to an average 6.45 billion shares per day from the week prior when volume was 6.52 billion shares, according to Bats Global Markets. Just one month ago volume was over 7 billion shares per day.

“The bulk of volatility seems to be confined to the foreign exchange and oil markets,” Peruzzi said. “Oil closed out the week down 4% and the U.S dollar rose 1%. The Pound sterling lost 2% on Friday after the U.K’s ruling conservative party failed to secure a 326 seat ruling majority.”

And speaking of the Pound and ruling majority, market attention turned to the U.K. as there will be a new coalition government formed with the Democratic Unionist Party (DUP) and Conservatives being forced to work together as the British people voted to reject Prime Minister May’s hard conservative agenda and voted. The net result, according to Nigel Green, founder and CEO of deVere Group, is that Brexit will now take much longer than expected and be less of a factor on the global or European economy.

“The UK election result is a hammer blow for a hard Brexit. May no longer has the ability to deliver on this as she did even 24 hours ago, for two key reasons,” Green began. “First, the British people have spoken and largely rejected much of the Conservative manifesto which championed a hard Brexit.  And second, the leader of the Democratic Unionist Party, which is joining forces with the Conservatives to form a coalition government, have said they will not back a hard Brexit.”

A “hard Brexit,” he explained, means to withdraw from the EU swiftly and with little thought to the remaining members of the UE. Talks on Brexit were due to begin June 19.

“The financial markets had almost already priced-in a hard Brexit and will now have to quickly reassess their position,” Green said. “As this adjustment takes place we can expect the uncertainty in the financial markets not only to continue but to intensify.”

More volatility could translate into more trading opportunities, he concluded.

“Looking towards Theresa May striking a soft Brexit agreement, the pound will begin to regain ground, short-term gilts will fall in price as yields go up and FTSE100 stocks will fall as the likelihood of an improving economy emerges,” he said.

Looking ahead to this week, Mischler’s Peruzzi said trading would likely be muted ahead of Wednesday and the FOMC policy announcement. Market consensus is for a 25 bps hike from 1% to 1.25% i- Fed Funds futures have priced in a 95% probability of a 25 bps hike as of last Friday.

“So, with the hike already priced in investors will comb through the accompanying statements but even there, as on past statements, we have seen little in market moving comments,” Peruzzi said. “We do not expect to see any irrational exuberance statements coming from the Fed any time soon. They dilemma is that many now expect this to be the last hike for several months.”

He added that trading wise the market has seen little in terms of major risk on/risk off trades. Instead, traders are engaging in moderate position/portfolio maintenance trading coupled with the occasional fundamental trigger trade. He expects this trend and trade to continue over the next few weeks.

In other market news, CBOE Holdings announced that C2 Options Exchange (C2), one of the firm’s derivatives markets, is planned to migrate to Bats technology on May 14, 2018. Beginning in November, C2 trading permit holders may begin basic connectivity testing, and in December, begin certification. Throughout the first quarter of 2018 and into the second quarter, there will be numerous ‘dress rehearsal’ opportunities for customers to ensure their preparedness for the move. Up until the migration, C2 will operate as is.

Chris Isaacson, EVP, Chief Information Officer at CBOE said: “We remain laser focused on executing a seamless technical and operational integration of the CBOE markets onto Bats technology. This is progressing well and remains on schedule and announcing the C2 migration plan is the logical next step in our process. All market participants expect us to execute a fully transparent, highly structured and efficient integration, and we fully intend to deliver on this.”

Also, Sandler O’Neill held its annual Global Exchange Conference investor conference in New York and Doug Cifu, chief executive officer of Virtu Financial, said that persistently low trading volume and volatility provide fertile ground for mergers and acquisitions in the electronic market-making space.

Cifu declined to address Virtu’s M&A plans other than saying any deal would need to add to earnings and make strategic sense. But broadly speaking, market conditions are making for a healthy universe of willing sellers, in both the proprietary-trading and agency-brokerage businesses.

Lastly and quietly, Citadel Securities announced that market veteran Joe Mecane was joining the firm as Head of Execution Services. According to a release, Mecane will lead Citadel’s equity, options, and ETF businesses, bringing his deep electronic trading experience and market structure expertise to bear on behalf of clients.

Mecane is no stranger to the equity markets. He joins the firm after serving at Barclays, where he was Global Head of Electronic Equities since 2014. Before Barclays, he served as Head of U.S. Equities and Co-Head of U.S. Cash and Listings for the New York Stock Exchange (NYSE). Prior to NYSE, Mecane was a Managing Director in Equities at UBS Securities.

This Week’s U.S. Economic Indicators of Interest:


Treasury Budget Statement



Redbook Retail Sales

FOMC Meeting Begins

Producer Price Index

Wednesday Consumer Price Index

Retail Sales

Business Inventories

FOMC Meeting Announcement

Thursday Jobless Claims

Philadelphia Fed Index

Import/Export Prices

Industrial Production

Friday Quadruple Witching

Housing Starts

Consumer Sentiment

Robert Kaplan Speaks


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