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Futures - Options - Forex

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Futures - Options - Forex

"Weekly Update – 04/03/17"

posted by CAPIS on 04/03/2017 at 8:21 am

by CAPIS

04/03/2017 at 8:21 am

Equity markets traded higher last week with the S&P500 Index (SPX) closing 2,362.72, up +0.90%, the Dow Jones Industrial Index (INDU) closing 20,663.22, up +0.55%, and the Russell 2000 Index (RTY) closing 1,385.92, up +2.11%. Despite the defeat of the healthcare reform bill, equities are now starting the 2nd quarter of 2017 on a positive footing: year to date the SPX is up +5.53%, the INDU is up +4.56, and the RTY is up 2.12%. Last week the total option volume was slightly lower than the previous week as 71,763,514 contracts were traded, averaging 14,798,423 traded contracts per day.

On Friday the SPX saw 1,266,633 option contracts trade while the VIX traded 262,635 option contracts. VIX continues to remain low and subdued trading below the 13 handle. Speaking of volatility, there was an interesting story last week on a volatility trader who keeps buying big size VIX calls around the $0.50 price level. For example, on Thursday, the trader bought 50,000 of the VIX 21 strike calls expiring in May for $0.50 per contract betting that volatility would spike by May.

These calls would expire worthless unless VIX jumps 82% in a month and a half. No one is certain if this is an outright play on long volatility or whether it is a hedge but after having spent over $90 million on these contracts and having seen $55 million expire worthless, this trader has left many scratching their heads. It would take a lot for the volatility index to move close to the breakeven point. There are few events that may push the volatility needle ever so slightly such as the second round of the French elections and the Obamacare subsidies expiring this May.

Futures are pointing to a green open for the equity markets with SPX futures trading higher to 2,360.25, +0.04%, and INDU futures were trading +0.08%, to 20,621.00. The US dollar index futures were higher this morning by +0.18% to 100.40, while precious metals were trading lower with gold futures trading around the 1249 handle.

Oil futures were higher this morning showing the strongest gains in four weeks given the renewed optimism in the OPEC production cuts and the possible extension beyond June. Oil prices rose nearly 5% last week.

This week’s biggest event will likely be the meeting between China’s Xi Jinping and President Trump. Any hints that Trump would attempt to label China a currency manipulator will likely have a negative impact on the markets. However, it is likely that Trump and Xi Jinping will come to a mutual agreement that serves the interests of both countries. President Trump has already pushed for stronger tariffs on imported Chinese goods as high as 45%, something that markets will be watching closely given the impact it would have on trade.

Although light, economic data was mostly positive last week: corporate profits increased to 9.3% on a yearly basis, the Michigan sentiment index remains positive, GDP revisions for Q4 were higher than the 2.1% estimated, and Pending Home Sales increased 5.5%. However, Personal consumption increased less than expected (0.1% vs 0.4%), and although jobless claims fell to 258K, the weekly average ticked up.

This week’s economic calendar is busy (all eyes will be on PMI/ISM and Employment):

  • Monday: Markit Manufacturing PMI, ISM Manufacturing, Construction Spending
  • Tuesday: Trade Balance, Factory Orders, Durable Goods, Capital Goods
  • Wednesday: MBA Mortgage Apps, ADP Employment Change, Markit Services PMI, FOMC Minutes
  • Thursday: Initial Jobless Claims, Bloomberg Consumer Comfort
  • Friday; Non-Farm Payrolls, Unemployment Rate, Wholesale Inventories, Consumer Credit

There are a number of Fed speakers this week. Today, Dudley, Harker, and Lacker speak. Tarullo speaks at Princeton tomorrow, Williams speaks on Thursday, and Dudley speaks in New York on Friday. It is undeniable that the markets are responding favorably to improving economic data. The Fed has hinted at two more rate hikes this year and to the surprise of no one, the markets managed a yawn. But the markets took note, and did not like it, when the Fed turned to discussing three or more hikes this year. The Walls Street Journal talked (gated) about the Fed using its balance sheet in lieu of additional rates adjustments. The Fed could effort to reduce the gigantic $4.5 trillion portfolio of mortgage and treasuries securities and aim to remove stimulus from the financial system. But even that would depend on the pace of economic recovery and one would beg the question how such a move would impact equities and more importantly this rally?

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