12.12.2016
By John D'Antona

TRADING THE WEEK: Market Hangs High Ahead of FOMC

It’s hard to keep a good market down.

The equity markets are trading near record highs and traders said that should remain the case, propelled by solid economic data and the post-Trump rally, as well as confidence that the Federal Reserve will finally raise short-term interest rates this week.

Last week, both the Standard & Poor’s 500 index and the Dow Jones industrial average surged to record highs as property and telecom stocks joined in the current post-election rally. “Appetite for riskier assets is strong amid investors, and nothing is stopping them from beefing up their bullish bets,” said Naeem Aslam, chief market analyst at ThinkMarkets.

“The Trump victory and growing sentiment that market friendly policies are forthcoming have U.S indices hitting new all-time highs daily,” said Larry Peruzzi, Managing Director of International Trading at the Mischler Financial Group. “Volatility, as measured by the VIX index, is near the lowest levels of the year. We are seeing shorts being squeezed as investors are putting idle cash to work, albeit mostly by means of passive investing.”

Larry Peruzzi, Mischler Financial Group

The month of December has historically been the best-performing month for the S&P 500, he added. Since 1950 the S&P 500 averages a gain of 1.7% in December. “This year we are firmly ahead of average with the S&P gaining 2.2% through the first 6 trading days. Normally we start to see some investors taking gains in December but with Trumps pledge to reduce capital gain taxes investors are holding off on selling,” Peruzzi said.

Trading on U.S. equity exchanges rose as traders were forced to either add or hold positions. Trading levels averaged 7.57 billion shares per day for the week ended December 9, according to Bats Global Markets data. That’s compared to an average of 7.05 billion shares in the week ending December 2.

“This has all help add more fuel to the market which in turn has pushed more sideliners into the market,” Peruzzi said. “Since the Wednesday after the U.S election 392 of the S&P 500 names (505 companies) are trading higher.”

So what next? Traders told Markets Media that this week will be off to a quiet start as economic releases are few but then pick up on Wednesday when the Federal Reserve is expected raise rates for the first time in a year. As Peruzzi noted, the thought of rising rates was a market mover earlier in the year but the current momentum makes Wednesday Fed announcement largely a formality. The only way it will move markets is if it is a smaller or large hike than the currently priced in 25 bps.

“The announcement’s wording should garner some interest. Also making rate decisions next week will be: Bank of England, Switzerland, Mexico, Chile, Peru, Indonesia and South Korea,” he said.

Also, third quarter earnings begin to trickle into the market as Oracle and Adobe Systems are the marquee firms that begin reporting on Thursday.

“We expect markets market strategy to return toward a more active managed approach from our current passive approach. With current rally pushing idle cash into the market the next step is the search for alpha,” Peruzzi said. “So the course of action next week seems to be: Put cash to work, watch President Trump’s tweets and comments for policy resolve, see what the Fed has to say and get ready to roll up your active management sleeves in January.”

In other market related news, Business Insider reported that the Securities and Exchange Commission is seeking more comment on an NYSE request to alter its pricing structure for certain transmission, data and colocation charges. Furthermore, many in marketplace are hoping this additional request for comment might serve as a starting point of a broad inquiry into the exchanges’ pricing policies for data, transmission and colocation fees.

Market data costs and availability could be yet another “Flash Boys” type conflagration in the making – awaiting a strike of the match to begin burning.

“The Commission is concerned that the Exchange (NYSE) has not supported its argument that there are viable alternatives for Users inside the data center in lieu of obtaining such information from the Exchange,” the SEC wrote in its request for additional comment. “The Commission seeks comment on whether Users do have viable alternatives to paying the Exchange a connectivity fee for the NYSE Premium Data Products.”

The SEC is soliciting data, views and arguments on this matter by December 12. The final deadline for all comments is December 27.

Also the last week saw the leadership of the Securities Industry and Financial Markets Association meet and declare now is a good time for market regulators and the industry to evaluate what is and is not working.

“Although innovation may have outpaced regulation before the crisis, we now have to consider if that pendulum has swung too far,” said Timothy Scheve, Sifma chair and CEO of Janney Montgomery Scott, at a press briefing in New York last week “Are we getting too far away from actualizing the benefits of stable, well-functioning markets?”

“We need to have regulatory balance,” Scheve continued. “We need to review the industry regulations to ensure that they are working as they were intended and not creating unintended consequences that inhibit economic growth in capital formation.”

 


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

Monday Treasury Budget Statement

 

Tuesday Redbook Retail Sales

Import Export Prices

FOMC Meeting Begins

Wednesday Retail Sales

 

Producer Price Index

 

Industrial Production

 

Business Inventories

 

FOMC Policy Announcement

Thursday Jobless Claims

 

Consumer Price Index

 

Philadelphia Fed Survey

 

Friday Housing Starts

Jeffrey Lacker Speaks

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