TRADING THE WEEK: A Tale of Two Markets

Its a tale of two markets.

Despite industry pundits stating the stock market cant go higher and exhibits bear market tendencies, prices refuse to fall. Investors still like stocks, especially in a rising rate environment, and wont sell. But pressures are mounting that make selling at the top very attractive.

Larry Peruzzi, Managing Director International Trading at Mischler Financial Group, noted this confluence of events and told Traders Magazine stocks finished last week a mixed bag week. On the one hand, the Russell rebalance last Friday added some trading volume and keeping prices within striking distance of fresh all-time highs.

The Dow and S&P 500 index hit record closes last Monday before pulling back on Tuesday and trading mostly sideways the balance of the week. Economic data was light with decent May existing home sales numbers on Wednesday, mostly in line PMI on Friday as well as better May new home sales. The mid-month spike in the VIX index is also subsiding as we closed out the week at the 10 level, down 13% over the last two weeks.

But on the other hand, market wrenching political drama remains as President Trump stays at the center of tampering allegations, future Fed rate hikes and lower oil prices, as well as a flat yield curve, keep a lid on activity. Peruzzi noted that some investors, such as Fundstrat Globals Thomas Lee, are starting to question the market rally duration.

He cut his 2017 and 2018 S&P 500 earnings outlook, Peruzzi noted. Also, oil remained weak with WTI crude down about 7% the last 2 weeks. Oils decline in the past would have pressured markets but weighting adjustments are allowing us to look past it.

Peruzzi said that it is increasingly feeling as though this market is dealing with two fears. The fear that valuations are stretched beyond the earnings justifications and fear that the lack of inflationary pressures will keep real rates low for the foreseeable future.

Trading last week was a continuation of the relief trade seen two week ago – staying above the 7 billion share per day level. Approximately 7.46 billion shares per day changed hands last week compared to the week prior when volume was 7.37 billion shares per day, according to Bats Global Markets.

Digging a little deeper it looks like the latter is winning, he said. Fed Funds are pricing in a 0% chance of a rate hike in late July and only a 16% probability of a hike in September. This could be setting us up for a Ground Hogs Day movie type of summer, same thing day after day. So, as investors head to the beach they will keep one eye on the sky for approaching storms and one eye on the markets for the same but the current pitcher seems to be blue skies for both.

And while on the subject of interest rates, the Federal Reserve should let a low 10-year Treasury yield and sluggish inflation recover before raising interest rates further, said Robert Kaplan, president of the Federal Reserve Bank of Dallas, in public comments last week. “From here now, I’d like to see evidence that recent weakness in inflation in March and to some extent April and May was transitory,” he said.

Chief Market Economist and Head of US Economics, Paul Mortimer-Lee, also weighed in on interest rate front, noting that Fed Chair Janet Yellen last week showed an open mind about raising the inflation target, in contrast to earlier dismissal of the idea.

We have argued since 2010 that higher inflation targets would be a good idea, he said.Too low inflation for too long is a chronic global problem that could become acute in a recession.

But, he added, there are costs of higher targets, but he thinks they would be outweighed by the benefits. In the US, a key obstacle is Congress; in the Eurozone, norther European attitudes.

A deeper question is whether inflation targeting is really an appropriate framework at all, given central banks inability to raise inflation expectations and a flat Philips curve, Mortimer-Lee said.

In other market news, Sen. Thom Tillis, R-N.C., has written Securities and Exchange Commission Chairman Jay Clayton requesting information on the agency’s preparation for Europe’s revised Markets in Financial Instruments Directive. “Absent some regulatory relief from the EU or US, conflicts between the two regulatory regimes will arise,” Tillis wrote.

Also, OTC Markets publicly objected to the proposed fee schedule put forth by the Consolidated Audit Trail (CAT) Plan Operating Committee in recently submitted comment letter to the Securities and Exchange (SEC), OTC voiced its opposition to schedule.

OTC Markets argued that the CAT Plan Operating Committee abused its discretion by placing OTC Markets’ OTC Link ATS in the first tier of execution venues along with the New York Stock Exchange and Nasdaq and that it incorrectly assigned OTC Link ATS to be the largest execution venue, at 29.9%, for the purposes of funding the CAT even though the share of OTC Link ATS in the combined market for NMS Stocks and OTC equity securities based on trade volume is less than 1%. Furthermore, the revenues the NYSE and Nasdaq derive from trading NMS securities is 20x greater than the revenues OTC Link ATS derives from trading OTC equity securities.

Instinet Holdings Incorporated today announced that it has entered into a definitive agreement to acquire State Street’s BlockCross ATS, an industry leading alternative trading system (ATS). Terms were not disclosed.

The transaction is expected to close in approximately 30-60 days, subject to satisfaction of closing conditions.

This Weeks U.S. Economic Indicators of Interest: