08.01.2016
By John D'Antona

TRADING THE WEEK: Fed Disappoints as Summer Doldrums Seen Extending

 

It’s summer in the city. And in the suburbs. And on Wall Street too.

After a week that included a potpourri of US economic data, including a GDP figure that showed economic growth was tepid, Presidential conventions and earnings reports, the equities market finds itself drifting as the dog days of summer are here. Traders reported flows were increasingly light for the last week given all the aforementioned extraneous noise and expected things to stay quiet – at least until this week’s US employment report on Friday.

Volume traded on U.S. equity exchanges averaged 6.48 billion shares per day for the week ended July 29, according to Bats Global Markets data. That’s up from an average of 6.05 billion shares in the week ending July 22.

“July was slow for us and from what I’ve heard around the Street, for everyone else too,” said a New York-based sales trader. “While there was a lot of talk about what the Fed would do or Clinton or Trump might say, the end result was zilch. No volatility and no real trading of consequence.”

Amid last week’s economic data of importance, US GDP was reported at 1.2% for the second quarter, slightly weaker than expectations. The Atlanta Federal Reserve’s GDPNow indicator, which some economists view as a proxy for the government’s benchmark, had indicated a 1.8% increase in GDP. In the official report, the consumer spending component was strong but was offset by slumping business investment data which indicates companies are tightening their belts in anticipation of an economic slowdown.

Another trader in the Midwest agreed, adding that the lack of action by the Federal Reserve at its two-day meeting left the market to move slightly back-and-forth based on the week’s economic indicators. It was also month-end, which saw some light position management trades but no real large scale trades.

“The window for the Fed to act is shrinking and the market know it,” the trader said. “Given that, the market is going to slow as August is here and vacation season really sets in. And once September rolls guys will start talking again about if and when the Fed will act and the election.”

Last week the Federal Reserve announced it was leaving short-term interest rates unchanged. In its policy statement, the Fed noted “near-term risks to the economic outlook have diminished.”

And when viewed against the economic data, the Central Bank might be unable to raise rates until after the US election or as some economists are starting to say, early 2017.

In the equity markets, IEX, the newest U.S. equity exchange, announced it has set up its market quality framework and hired staff to oversee market monitoring. While IEX leverages the Financial Industry Regulatory Authority to do regulatory surveillance, company co-founder and COO John Schwall said it was also best to have its own in-house staff to watch what goes on inside the walls at IEX’s 4 World Trade Center headquarters.

This initiative, as told to Markets Media in an interview by Schwall, is meant to bolster trader confidence in its business model and help the bourse fulfill its new mandate as a Self-Regulatory Organization.

The exchange on August 19 will begin to migrate over a pilot security system and move the first two NMS securities. About a week later, IEX will move an additional 10 securities off its existing platform. On September 2, IEX expects to migrate over the remainder of its NMS securities to the exchange platform.

Also, market consultancy Greenwich Associates reported that smaller and regional brokers are poised to grab customers and commissions from the bulge bracket firms. According to Greenwich, as recently as 2007, the nine leading bulge-bracket brokers captured 78% of commissions paid by institutional investors on trades of U.S. equities. This year, they are claiming only 60%–down a full two percentage points from 2015. Much of the lost share has flowed to mid-sized/regional dealers, which as a group now take home 28% of U.S. equity commissions, up from just 11% in 2007.

 

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

Monday PMI Manufacturing Index

ISM Mfg Index

Construction Spending

Tuesday RedBook Retail Sales

Personal Income and Outlays

Wednesday ADP Employment Report
Thursday Weekly Jobless Claims
Factory Orders
Friday Employment Situation

International Trade

Consumer Credit

 

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