05.30.2016
By John D'Antona

TRADING THE WEEK: Markets Sanguine Ahead of Potential Rate Hike

The equity markets closed the week on a positive note, buoyed by increased optimism that the U.S. economy is strong enough to withstand a hike in interest rates as soon as next month.

Durable goods, jobless claims and decent retail sales figures all buoyed stock prices and trading on reasonably solid volume ahead of the U.S. Memorial Day holiday weekend.

In a speech on Friday afternoon, Federal Reserve Chair Janet Yellen said a rate increase in the coming months is ‘probably’ appropriate. The non-dovish remarks boosted speculation that the Fed will move next month. Notably, the market handled the tightening timeline being pulled forward in stride.

“The data were all good and despite the market being a little ‘toppy’, volume was good,” said a senior trader in New York. “While the Fed is out there and a rate hike looks more plausible, the market can handle it and that has investors confident with their purchasing plans.”

Also supporting the stock market were solid housing and industrial production data, this trader added. Average daily trading volume as measured by Bats Global Markets was about 6.49 billion shares for the week ended May 27, compared with 7.24 billion shares the previous week. In the week before Memorial Day last year, average daily trading volume was 5.81 billion shares.

Aside from looming Fed action, traders are closely watching the state of the market for initial public offerings, as well as the strength of the Chinese yuan.

The outlook for next week looks better, according to traders, as the new issuance in the IPO market shows signs of life. In an interview with Yahoo, NYSE Group President Tom Farley noted that last week’s successful IPOs of US Foods, Gypsum Management and Supply and Cotiviti Holdings were supportive of more new issues to come. And a growing IPO market, he added, would bring more secondary trading supply and activity. “Today is a really good signal,” Farley said last Thursday.

The IPO market has been sluggish overall this year with only 41 new IPOs printing compared to 83 in the same time period last year.
According to Farley, more firms are coming to the market or are looking to. “We have about a dozen companies that are circling June for their IPOs,” he said, “and included among them are several well-known companies — large, successful companies.”

The IPOs could well come before the FOMC meets again later in June as market expectations are again moving towards a rate hike. Any rate hike would increase the cost of borrowing for companies.

Traders also noted the dollar-yuan trade is worth noting, as weakness in the Chinese currency would hurt the U.S. economy. Last week the yuan hit a 5 year low versus the dollar.

Evercore ISI technical analyst Rich Ross said that weakness in the yuan, viewed in the market as a devaluation of the currency, could also bring U.S. stocks down – much like has already been seen this past year.

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

Monday  Markets Closed
Tuesday  Personal Income
Chicago Purchasing Managers Index
Consumer Confidence
Dallas Fed Meeting Minutes
Wednesday New Car Sales
Redbook Retail Sales
PMI Manufacturing Index
ISM Manufacturing Index
Construction Spending
Fed Beige Book
Thursday Chain Store Sales

Weekly Jobless Claims
Treasury Refunding Announcement

Friday  Non Farm Payrolls
Factory Orders

More Trading The Week:

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