TRADING THE WEEK: Investors Eye Valuations, Inflation

Traders were less active last week as price-earnings ratios begin to signal a sell opportunity for some, and inflation data looms larger.

U.S markets spent most of last week listening to noise out of Washington regarding such things as the travel ban, Ivanka Trump’s clothing line and cabinet appointment nomination hearings – but little else.  With little in terms market moving economic data, financial markets were trying to determine if recent run up to record levels left assets overvalued.

Trading on U.S. equity exchanges was muted last week as traders opted to stay somewhat dormant after recent employment data and Washington DC rumblings. Trading levels averaged 6.61 billion shares per day for the week ended February 10, compared with 6.80 billion shares the prior week, according to Bats Global Markets data.

Larry Peruzzi, Mischler Financial

One topic that did surface garnering market attention, according to Larry Peruzzi, managing director of international trading at Mischler Financial, was that global monetary monetary policy is beginning to become more independent – countries appear to be moving independent of one another rather than moving in concert.

“Some Central Banks are now raising while some are cutting, many still standing put but we are no longer moving in lockstep,” Peruzzi said. “This should create many global trading opportunities in fixed income securities. Also, earnings season will continue to wind down with 67 companies (heavy in techs) reporting” in the week of February 13.

Peruzzi did add that the market could find fresh impetus to trade this week as there are several economic data releases that should help the Federal Reserve get a clearer read on the economy and potential inflation – Tuesday there is PPI, Wednesday CPI and retail sales and Thursday's housing starts and building permits.

“Although recent released statements have indicated the Fed is happy to hold rates unchanged a little longer,” Peruzzi said. “Chairwomen Yellen has a full week as she appears before the Senate Banking Panel on Tuesday followed by her Semi-Annual testimony to the House Panel on Wednesday.”

He added that more investors are looking at valuations as the S&P 500 price to earnings ratio rose to 21.2. “We have seen it higher but as we approach a P.E of 24 and 25 many will be looking to book some profits. So, overall investors will continue to dance with the market as long as the music continues but watch those valuations and inflation indicators,” Peruzzi said.

Also in the markets, there's a new options exchange on the block and open for business. Exchange operator Miax launched Miax Pearl, which began formal operations last Monday. The successful launch brings the total number of U.S. options markets to fifteen.

Pearl opened with IBM as its first symbol trading. Miax Pearl will continue listing options on IBM for its first week of trading and then begin rolling out additional symbols thereafter. It is the second exchange of the Miax exchange group following the launch of Miax Options in December 2012 by its parent holding company Miami International Holdings. Pearl employs maker-taker pricing.

Secondly, Sell-side firms were given direct access to a new block trading service for the European equity market launched by stock exchange operator Bats Europe in December and asset managers will gain direct access over the next month.

Bats Europe licensed technology from Bids Trading, the largest block trading ATS by volume in the US to launch Bats LIS (Large in Scale) in December. Buy-side firms have been able to access Bats LIS through a broker but the service is being rolled out so asset managers also have direct access.

Lastly, with four months of Tick Pilot's 24-month duration completed, the pilot's winners and losers are clear to see, according to a recent presentation made by the Securities Traders Association.

After analyzing trading data provided by 39 brokers and more than 70 buy-side clients, Philip Pearson, director, algorithmic trading at agency brokerage ITG and who gave the presentation, sees passive trading strategies taking the greatest hit from the pilot while venues with inverted pricing witness a boom in pilot-related liquidity.

Comparing a two-month period on both sides of the pilot's October 2016 rollout, Pearson noted that volume-weighted average price slippage has grown by approximately two basis points.

"That is about a 13% increase over the pre-pilot period, which is extreme since the control group saw an 11% decrease," he said.

Other types of algorithms, such as arrival price algos, also have witnessed a four-basis-point increase in execution costs over the same period.

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