TRADING THE WEEK: Focus on Earnings, Election

The equities market is returning back to basics, as traders watch earnings reports and other stock market specific developments rather than what the Federal Reserve is or isnt doing.

Last week was a docile one for the equities market, as Octobers seasonals took center stage – falling leaves and modest to falling volatility. Traders looked to the slate of corporate earnings and how companies reported they fared better in the third quarter versus the second.

Larry Peruzzi, managing director of international trading at Mischler Financial Group, told Markets Media that he was surprised at the third quarters earnings picture – with 116 S&P 500 names reporting that the average earning surprise is currently 6.73% versus 4.28% in the 2nd quarter.

While we saw a 10.4% jump in earnings surprise from Q1 to Q2 the current jump of 57.6% in earning surprise is worth taking note, Peruzzi said. Netflix got us started on (last) Monday with good earning and forward guidance, the stock responded with a 21% gain for the week. We also saw some late week appreciation in the U.S dollar as investors are starting to position themselves for higher rates in the near term.

As for last week pertinent economic data, Peruzzi added that a weak Empire Manufacturing number last Monday was offset by benign September CPI data on Tuesday, October 18^th.

Trading on U.S. equity exchanges averaged 5.84 billion shares per day for the week ended October 21, according to Bats Global Markets data. Thats down from an average of 6.21 billion shares in the week ending October 14.

Looking to this week, traders will continue looking ahead Q3 earning numbers as 262 U.S companies are expected to report.

However, as one floor trader explained, the economic data calendar is loaded with new home sales on Wednesday, preliminary durable goods on Thursday and then closing out the week is the Michigan consumer sentiment reading on Friday.

For months market volatility had been influenced largely by Fed watching but this week the probability of a December rate hike has held steady in the 65 to 69% range, Peruzzi said, welcoming the lack of Fed watching and a return to market fundamentals.

This leads us to believe that with the approaching election Fed governors are carefully crafting their comments and possibly the Fed is close to consensus on the timing of a rate increase, he continued.

Also this week, Federal Reserve governors with Dudley, Bullard, Evans and Powell are all speaking at various events and sure to generate some market buzz and headlines. Lets not forget the fact that with the U.S. general election less than two weeks away there is sure to be some short term volatility and movement in certain stocks.

With the Presidential election nearing and poll margins widening we expect that Mr. Trump will be making a hard push to mix things up even more. If we are to believe the 9 point margin we should start seeing action in the Pharmaceutical, healthcare and clean energy stocks, Peruzzi said.

Furthermore, he added that colder weather is forecast for the east coast so the market will watch energy prices partially on Wednesday when the DOE releases its latest inventory numbers.

So the days of a Fed stimulated markets seems to be in its twilight and focus it slowly being replaced by consumer demand, energy prices, corporate earnings and our 45th U.S Presidents anticipated agenda, Peruzzi said.

In other equity market news, in the wake of the SECs review of Regulation National Market Structure to improve market transparency and governance of the equities market, the Investment Company Institute announced that it was responding to the ongoing review of the rules under the Regulatory Flexibility Act. ICIs President and Chief Executive Officer, Paul Schott Stevens, made several suggestions on how to improve the regulation and maintain the integrity of the marketplace. ICIs Stevens shared his letter with Markets Media. In his letter, Stevens made three specific targeted suggestions that he argued would benefit the market.

Across the Pond, MiFID II, the regulations covering European financial markets from 2018, took ceneter stage during a webcast from Norton Rose Fulbright. Jonathan Herbst, global head of financial services regulation at NRF in London, said on the webcast that one of the big issues is that the European Securities and Markets Authority has not published the detailed transparency requirements.

There are still questions over who provides data to the APA , how to comply, whether the buyside can have a direct relationship with an APA or should use broker arrangements, added Herbst. A big questions is whether the transparency requirements apply to investment firms when they act as both principal and agent.

This Weeks U.S. Economic Indicators of Interest:

More on Trading:

o Buyside Worried About MiFID II Transparency

o ICI Calls For Reg NMS Governance, Transparency Overhaul

o Brexit Holds Promise for Vol-Hungry Traders