TRADING THE WEEK: Nothing Sticks to ‘Teflon’ Market

The future of the equities trading markets isn’t so bright that it has to wear shades. But it doesn’t need an umbrella either.

The equities market has managed to move very little amid multiple economic data reports, earnings and speeches from the entire Federal Reserve governorship. Volatility remains low and brokers are reporting its so quiet on the Street that the traditional “sell in May and go away” trade isn’t even making the rounds.

So, what exactly is going on?

Looking back to last week, the Federal Reserve didn't change its key interest rate when it met Wednesday. In a statement after the two-day meeting, the rate-setting committee downplayed setbacks in economic growth and hiring, possibly signaling it is leaving the door open for a rate hike in June. But that doesn’t mean the interest rate setting body isn’t going to move soon.

According to the research group at BNP Paribas, last Friday’s nonfarm payrolls justify the Fed’s looking through the recent weak numbers relating to GDP and support a June hike. BNP noted that despite the economy only averaging a jobs growth of 184.5k in the first four months of the year the employment rate has still dropped to 4.4%, equaling the lows registered in 2006-07.

Nicolas Colas, Convergex

“The Fed Chair’s favorite measure of labor underutilization, the U-6 measure of unemployment, has fallen from 9.2% in December last year to 8.6%, the lowest since 2007,” the analysts wrote in a trading note. “The labor market looks extremely tight. We believe these figures will very much worry the hawks on the FOMC, since the lower unemployment rate shows the economy is growing above potential even before tax cuts are legislated. This opens the distinct possibility of overheating in the economy in 2018, when they are likely to bite. Against this background, the Fed needs to carry on hiking, with the aim, even if the Fed dare not say so, of slowing growth and curbing the decline in the unemployment rate.”

But this doesn’t portend doom and gloom for equities, according to Nick Colas, chief market strategist at Convergex, who noted there has been an extended period with no selling of equities regardless of data or volatility levels. He said that continued lack of selling in the equities market was due more to “seller’s strike” than anything else.

“I have been writing a lot about US equity market volatility this week, and it strikes me that this phenomenon might have a role in creating the current low-vol environment,” Colas began. “Since the details of the President’s proposals to change the tax code are still not public, asset owners may be continuing to defer sales in the hopes of better tax treatment down the road. This seller’s strike, where individuals with capital gains in equities are waiting for a new and hopefully more capital-friendly tax code before selling stock.”

So what does it all mean?

Larry Peruzzi, Mischler Financial

According to Larry Peruzzi, Managing Director International Trading at Mischler Financial Group, the current market status quo could hold for a time until either the Fed acts or President Trump makes known either his tax codes changes or some other major policy initiative.

“We seem to be in a Teflon market where both good and bad news alike just slide off the market,” he began. “Market expectations for a rate hike next month jumped to 75% from 60%, but much of this is contingent on a rebound in employment growth in April and May. The question we all have is how long can this keep going?”

Trading this week was moderate at 7.08 billion shares, not quite as robust as the week prior when activity was reported at 7.11 billion shares during the ended April 28, according to Bats Global Markets.

Looking ahead, Peruzzi said that markets will be eyeing the outcome of Presidential elections in France as well as next week’s inflation data (both April PPI and CPI), retail sales, Business inventories and Michigan sentiment closing out the week. There are also a bevy of Fed speakers again on tap, he added, which could generate some life into the tape.

“But make no mistake about it, the Fed is looking at just 2 things - jobs and inflation and recently both of those have not shown to be either hawkish or dovish,” he said. “So, call it a goldilocks market or a Teflon market but until volatility returns brokers will continue to see low trading volumes. This will certainly result in lower earnings for the brokers in Q2.”

In other market news, Jay Clayton was formally confirmed as the next Chairman of the Securities and Exchange Commission. The final vote, held last Wednesday was 61 to 37. "Jay's broad experience and his keen understanding of capital markets and securities regulation will serve all market participants well as the SEC works to ensure that safe, strong securities markets remain a cornerstone of the U.S. economy. I look forward to working with him in his new role, " said Robert Cook, president of Financial Industry Regulatory Authority, the industry's self-regulating organization, in a statement.

Also, BATS Global Markets, a CBOE Holdings company, announced the planned introduction of the Bats ETF Implied Liquidity Feed, which provides investors with a critical reference view of ETFs versus their underlying securities.

The feed, which is filed and pending publication by the Securities and Exchange Commission, measures the implied liquidity of a fund using select data points, which includes information regarding the ETF’s underlying securities. The feed includes a proprietary calculation of the fund’s implied liquidity and the aggregate best bid and offer of all displayed orders across the four Bats equity exchanges.

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