TRADING THE WEEK: What, the Fed Again?

What’s old is new again in the equities trading markets – talk of what the Federal Reserve will do at its upcoming policy meeting.

After months of the Trump rally, talk of tweets and executive orders, the Fed and potential interest rate hikes had faded into relative obscurity as share prices and valuations moved higher on economic optimism. But now the focus has turned back to the Fed and what might come at the upcoming March 14-15 meeting.

Bill Mingione, Drexel Hamilton

Interest rate talk was around and about the market as traders’ discourse moved distinctly from “if” the Fed was going to raise rates to “how much and soon.” Improvements in the economy and the possibility of fiscal stimulus have increased the chances that the Federal Reserve will raise interest rates this month, said Fed Governor Jerome Powell in a speech last week. Futures markets are putting as much as a 90% likelihood that rates will be raised by at least 25 bps at the next meeting which begins on March 14. Some traders told Markets Media that the Fed could surprise the market could bump rates even higher – 50 bps – given recent comments on fiscal policy and wage push inflation pressures.

Jessica Rabe, research associate at Convergex, a global brokerage company based in New York said that when looking at the Fed’s dual mandate, labor markets remained tight amid reports of widening labor shortages, while shortages of skilled workers helped put upward pressure on wage growth. Prices on the other hand were little changed. Looking at this plus the regional reports from the district branches and banks, it looks like the markets are still signaling a greater than 60% chance for a March hike.

William Mingione, Managing Director – Head of Equities at Drexel Hamilton told Markets Media that the old adage, “the trend is your friend,” still hold’s true even in the shadow of Fed action.

“The market has continued to show signs of strength. The market continues to trade in overbought conditions but shows no signs of weakness in the RSI indicators,” Mingione said.

Looking back at last week, he recounted lots of hype with the highly anticipated IPO of Snapchat (SNAP) which went off well during a down tape.

Snap, maker of the Snapchat messaging service saw its issues sell for $17 in the IPO and rise as high as$26.05. They were last quoted on the New York Stock Exchange at $28.82 or up 159 percent from its offering price. CBOE Holdings announced it plans to list options on Snap. The exchange anticipates trading in options on Snap will begin on Friday, March 10, once the underlying stock has been certified as meeting all of CBOE Holdings' applicable exchanges' listing criteria.

CBOE plans to list Snap options on its four options exchanges -- Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2), Bats' BZX Options and Bats' EDGX Options.

Also, Mingione’s firm hosted a Washington DC bus tour this week visiting several Washington, DC-area defense and internet technology firms. Based on his personal conversations and analysis, he believes most of the likely paths forward that he heard are generally very positive (stock prices moving higher) ffor defense and the IT stocks.

Trading on U.S. equity exchanges was reported at an average 7.46 billion shares per day for the week ended March 3, according to Bats Global Markets data.

In other market news, Greenwich Associates reported the cost to trade U.S. equities via people has held steady during the last year at 12 basis points while exchange traded funds (ETFs), which are gaining in popularity and provide more stability, are getting more expensive to trade.

Also, CBOE Holdings reported that it completed its acquisition of Bats Global Markets, Inc. last week in a cash and stock transaction valued at approximately $3.4 billion (based on the closing price of CBOE Holdings shares on February 28). CBOE’s leadership team is headed by Edward Tilly, Chairman and CEO of CBOE Holdings.  Chris Concannon, formerly CEO of Bats Global Markets, is now President and COO of CBOE Holdings.

Also, Tabb Group reported that total volume in the U.S. options market reached 4.06 billion contracts in 2016, a 1.9% decline from 2015. The reason for the drop – lack of volatility. As Tabb wrote, “as a lack of sustained volatility has resulted in little perceived volume growth, U.S. listed options volume for 2017 is expected to also remain fairly stagnant.”

Lastly, the Senate Banking Committee is expected to consider the nomination of Jay Clayton as SEC Chair this week. While some Democrats have raised objections to Clayton given his background representing financial services firms, market observers do not expect any serious obstacles to his confirmation. Once confirmed, some items which may be high on Clayton's agenda include measures to encourage more initial public offerings and to ease the accounting and compliance rule burdens for mid-sized companies.

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