09.26.2016
By John D'Antona

TRADING THE WEEK: Back to Trading After Fed Meeting

Now that the Federal Reserve is out of the way — for now — traders can get back to trading for reasons other than speculating whether the central bank will raise rates sooner or later compared with market expectations.

The equity markets breathed a collective sigh of relief as the Federal Open Market Committee opted not to raise short-term interest rates last week, indicating via Chairman Yellen’s remarks that while economic data are incrementally showing the US economy is growing, she is inclined to leave rates unchanged and keep an accommodative monetary policy bent. Activity picked up as traders got back to the business of trading sending the markets slightly higher.

Last week started with solid fundamental corporate news trying to take the lead away from Wednesday’s FOMC decision, but it did not, according to Larry Peruzzi, managing director of international trading at Mischler Financial Group. Once the FOMC made its intentions clear to leave rates unchanged likely until December, trading should get back to some sort of norm despite it remaining “a central bank market” on an underlying basis.

Politics and third-quarter earnings will be near-term market drivers, Peruzzi told Markets Media. “With volume slowly creeping back into the market, hawkish sentiment grew with Bill Gross saying last Tuesday that odds of a Wednesday rate hike were 50/50. Wednesday’s Fed decision to leave rates unchanged pending ‘further evidence’ sent the bulls racing again.”

And the interest rate landscape is eerily similar across the markets – while the Fed left rates alone here central banks across the globe also did. The central banks in Egypt, South Africa, Philippines, Norway, New Zealand, Turkey, Bank of Japan, Hungary, and Kenya all left rates unchanged while Indonesia cut rates by 25 bps.

Last week the market closed out the week with the rally losing a bit of momentum as crude oil seemed to be hitting a resistance level. This followed last Tuesday’s decline in August housing starts and building permits, which when coupled with Thursday’s drop in August existing home sales, might be signaling a slowdown in the hot, low-rate-driven, housing market, Peruzzi said.

Looking ahead Fed watching will still be in vogue. Boston Fed president Rosengren said in a statement last Friday that the Fed’s failure to get back to a strategy of gradual rate increases may threaten the economic recovery.

“We closed out last week with Fed Fund futures pricing in only a 21% probability of a November rate hike but that jumps to a 56% probability in December,” he said. “We will look to see if today’s new home sales data confirms this week’s data in housing. The big number Wall Street and voters will focus on will be September’s employment report due the following week on October 7th. This will be the last employment report prior to November’s presidential election.”

Another floor trader in New York added that with the Fed likely on the sidelines until after the U.S. presidential election investors would be getting back to trading.

“We should see some old fashioned buying and selling now that the interest rate move is two months away,” he said. “This will be a time where people can add or trim positions ahead of year end. Maybe with the data slated to come we might even get some volatility and that can only help trading volume.”

In terms of volume, U.S. equity exchanges averaged 7.24 billion shares per day for the week ended September 23, according to Bats Global Markets data. That’s down from an average of 7.74 billion shares in the week ending September 16.

And speaking of Bats Global Markets, last week, reports surfaced that the Chicago Board Options Exchange is interested in acquiring Bats Global Markets. While there was no official comment from either exchange operator, traders speculated that the merger of the two, especially in options trading, was beneficial and would wring out cost savings and promote economies of scale.

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

Monday New Home Sales

Dallas Fed Manufacturing Survey

Tuesday Redbook Retail Sales

Purchasing Managers Index

Consumer Confidence

Richmond Fed Manufacturing Index

Wednesday Durable Goods
Thursday GDP

International Trade

Jobless Claims

Existing Homes Sales

Janet Yellen Speaks

 

Friday       Personal Income

Chicago Purchasing Managers Index

Consumer Sentiment

 

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