11.07.2016
By John D'Antona

TRADING THE WEEK: Return of Volatility Spurs Pre-Election Trade

The J Edgar Hoovers were able to spur trading in equities as the re-opened FBI investigation into Presidential hopeful Hillary Clinton provided the markets with a welcome dose of volatility.

Tightening polls in an election that had been considered in the bag for the Democratic nominee did what tge Federal Reserve, quarterly earnings, oil prices and economic data was unable to do for the last few weeks – goose trading. The shift, according to Larry Peruzzi, Managing Director International Trading at Mischler Financial Group caused market volatility to spike – a whopping 42% rise in the VIX index over the last week.

Activity during the week was brisk, moving higher thanks to Friday’s U.S. jobs data and the uncertainty surrounding this week’s U.S. presidential election. Trading on U.S. equity exchanges averaged 7.62 billion shares per day for the week ended November 4, according to Bats Global Markets data. That’s compared to an average of 6.46 billion shares in the week ending October 28.

“Make no mistake about it, this market is squarely being controlled by this Tuesday’s U.S Presidential election,” Peruzzi said. “We did have numerous noteworthy items this week. A decent October jobs report when looked at coupled with September’s 35K revision higher to the overall payroll number, gains in nonfarm productivity, some growth in ISM manufacturing, and dovish personal income and spending data.”

On top of that positive economic data, other traders reported there was weakness in oil prices as last Wednesday’s U.S inventory and OPEC production data pushed WTI Crude back below $44 a barrel and down 9% for the week.

Central bankers stood fast – as both the U.S. Federal Reserve and the Bank of England both opted to keep interest rates unchanged.

Third quarter earnings last week continued to trickle in and according to a floor trader in Ne York, were OK and not necessarily noteworthy, other than that it marked a end to the third quarter earnings season.

Looking ahead to this week, the U.S. Presidential race will be the prime focus and is in the driver’s seat. As one trader remarked, once the election results are in trading can then return to a relative state of normalcy.

“Last week the markets saw a fair amount of hedging and speculative trading activity,” a trader said. “Looking to this week it will be the Election on Tuesday and the results analysis on Wednesday that will dictate our direction and short term future.”

Fed speakers are on tap for this week – pushing the Fed Fund Implied Probability Index to price in a 74% chance of a December 14 rate hike of 25 bps. Chicago President Evans speaks on the Economy and Policy in NYC on Tuesday. Other officials are slated to speak as well.

“We might see the gloves come off with some interesting and insightful comments coming out after the election,” Mischler’s Peruzzi said. “In a nutshell markets will be looking at higher interest rates soon and a potential shift in power in Washington. Cash looks to be King until these story lines playout.”

In related market news, industry members had the the chance to share their views on Regulation NMS with the US Securities and Exchange Commission as the regulator has put a review of the rule out for comment.

“If you look at the comments files on the IEX’s exchange application, it sort of became a referendum on Reg NMS, which is a great thing,” said SEC Commissioner Michael Piwowar during a financial markets conference hosted by Baruch College’s Zicklin School of Business in Manhattan.
Now the industry can address the subject directly. Under the Regulatory Flexibility Act, the SEC annually publishes a list of rules that it looks to revisit to gauge their impact on small entities. This year, Reg NMS made the list, according to Piwowar.

“We put the list out for public comment and, on average, we get zero comments,” he said. “This year we put out our list in September, which included Reg NMS, It’s an opportunity for everyone to call for a more comprehensive review of market structure.”

Piwowar has suggested that the SEC implement a wholesale review of Reg NMS based on the model used in the Special Study of Securities Market published by the SEC in 1963 as well as the UK’s Foresight Programs.

Also, exchange operator Nasdaq continued its move away from trading derived revenue streams and launched an equities and US Treasuries analytics platforms, dubbed Trading Insights and eSpeed Analytics. Both products come out of Nasdaq’s Global Information Services Innovation Lab, according to Oliver Albers, vice president of Global Information Services at Nasdaq.

The goal of the innovation lab is to bring members of Nasdaq’s various businesses lines together with data scientists to determine potential new products using machine learning and other nascent technologies, added Jeff Kimsey, vice president and head of global product management for Global Information Services at Nasdaq.

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

Monday Labor Conditions Market Index
Tuesday Redbook Retail Sales

Charles Evans Speaks

U.S. Presidential Election Day

 

Wednesday Wholesale Trade
Thursday Jobless Claims

James Bullard Speaks

 

Friday

Consumer Sentiment

More on Trading

 

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