Wall Street set to open higher as post-Christmas rally continues

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 27, 2018. REUTERS/Eduardo Munoz

By Medha Singh

(Reuters) – Wall Street was set to open slightly higher on Friday, extending a two-day rally amid volatile trading and raising hopes that the recent selloff may have eased for now.

The three main index futures rose more than 1 percent before paring some gains.

At 8:38 a.m. ET, Dow e-minis were up 0.43 percent. S&P 500 e-minis were up 0.38 percent and Nasdaq 100 e-minis were up 0.23 percent.

The final week of 2018 has seen wild swings in equities, with the CBOE Volatility Index, Wall Street’s main fear gauge, hitting its highest level since early February before easing slightly.

The benchmark S&P 500 tested its 20-month low early in the week and was at the brink of bear market territory before the three main indexes roared back with their biggest daily surge in nearly a decade on Wednesday and a late rally the following day.

On Thursday, the S&P fell as much as 2.8 percent but closed 0.8 percent higher as markets turned around late in the session.

In a sign of optimism on trade on Friday, China opened the door to imports of rice from the United States for the first time ever in the run-up to talks between the two countries in January.

“Yesterday’s reversal suggests the market has made a temporary bottom and we could probably rally well into the new year,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“In spite of the government shutdown, the market seems more concerned on trade talks, which are somewhat lifting the negative sentiment.”

Stocks could swing between gains and losses due to the volatility but end-of-the-year window dressing and investors looking to buy stocks at attractive valuations should end in a positive session, Cardillo said.

Heavyweight technology names including Microsoft Corp, Apple Inc and Amazon.com  – which were among the biggest boosts to Wall Street’s rally on Thursday – rose more than 0.5 percent in premarket trading.

Of the 30 Dow components, 29 were trading higher.

The three indexes are set to end the week with gains of more than 3 percent each, snapping three straight weeks of steep losses.

Still, the indexes are down more than 9 percent for December and remain on track for their biggest annual percentage drop since 2008.

Investors head into 2019 with a list of worries ranging from U.S.-China trade tensions, rising interest rates and a cooling economy to a partial U.S. government shutdown, which is now in its sixth day.

(Reporting by Medha Singh in Bengaluru; Editing by Anil D’Silva)

Rookies and robots brace for first UK rate rise since 2007

Office lights are on at dusk in the Canary Wharf financial district, London, Britain,

By Fanny Potkin and Polina Ivanova

LONDON (Reuters) – Financial markets braced this week for what could be the Bank of England’s first rate rise in a decade – a step into the unknown for a generation of young traders who started work after 2007 but also for the state-of-the-art technology they use.

After a decade that included a global financial crash, numerous investigations into market collusion and relentless automation, trading floors at banks in London have been transformed in ways not obvious at first glance.

The newest kid on the block is not necessarily the rookie trader with a PhD in physics but the latest computer model or algorithm. How these models will perform under the almost novel circumstances of tightening monetary policy is as much a question as how the human neophytes will react.

Using past market data, assessments of demand, valuation models and even measures of how upbeat news headlines are, computers crunch the numbers, game the scenarios and buy or sell in the blink of an eye.

But shocks such as Brexit have shown that computer-driven trading can end in stampedes, or so-called flash crashes.

“You’ve got to weigh up the strength of the traders and the strength of the algorithms that have been developed and whether they can manage this kind of a process when the rate hike does come in,” said Benjamin Quinlan, CEO of financial services strategy consultancy Quinlan & Associates.

At Citibank’s expansive trading floor in London, the dealing room doesn’t look much different from a decade ago with traders hunched in front of banks of screens, the odd national flag perched on top, and television screens on mute.

But beneath the outward appearance, foreign exchange trading has undergone a seismic shift: more than 90 percent of cash transactions and a growing proportion of derivatives trades in the global $5 trillion a day FX market are done electronically.

So-called smart algos, or fully automated algorithmic trading programs that react to market movements with no human involvement, were virtually non-existent in 2007. Now, almost a third of foreign exchange trades are driven solely by algorithms, according to research firm Aite Group.

“Most of these algorithms haven’t really been tested in a rising interest rate scenario so the next few months will be crucial,” said a portfolio manager at a hedge fund in London.

To be sure, the U.S. Federal Reserve’s first rate rise in a decade in 2015 provided a dry run for this week’s UK decision – but the two economies are in very different positions and the knock-on effects on the wider financial markets of a Bank of England move are hard to predict.

 

ROOKIES AND ROBOTS

Much has changed since the Bank of England raised rates by 0.25 percent on July 5, 2007 to 5.75 percent. The first iPhone had yet to reach British shores, the country’s TVs ran on analogue signals and Northern Rock bank was alive and well.

Where once lightning decision-making and a calm head in a crisis were at a premium, the bulk of trading today is done by machines and the job of a foreign exchange sales trader is often little more than minding software and fielding client queries.

Itay Tuchman, head of global FX trading at Citi and a 20-year market veteran, said while the bank employs roughly the same number of people in currency trading as over the last few years, fewer are dedicated to business over the phone.

“We have an extensive electronic trading business, powered by our algorithmic market making platform, which is staffed by many people that have maths and science PhDs from various backgrounds,” said Tuchman, who heads trading for Citi’s global developed and emerging currency businesses.

London is the epicenter of those changes with the average daily turnover of foreign exchange trades executed directly over the phone down by a fifth to $566 billion in just three years to 2016, according to the Bank of England.

At Dutch bank ING’s London trading room, Obbe Kok, head of UK financial markets, said the floor now has about 165 people but the bank wants to make it 210 by the end of the year – searching mainly for traders attuned to technological innovations and keen on artificial intelligence.

The proportion of people employed in trading with degrees in mathematics and statistics has increased by a 58 percent over the last 10 years, Emolument, a salary benchmarking site, said.

“What banks have started to do is trade experience for technological skill and with electronic platforms growing, the average age on the floor is a bit younger,” said Adrian Ezra, CEO of financial services recruitment agency Execuzen.

 

TAPER TANTRUM

The increasing use of technology means traders can gauge the depth of market liquidity at the click of a button or quickly price an option based on volatility – a major change from a few years ago when they had to scour the market discreetly for fear of disclosing their interest to rivals.

Ala’A Saeed, global head of institutional electronic sales and one of the brains behind Citi’s trading platform FX Velocity, said its electronic programs process thousands of trades per minute.

Most of the currency trading models used by banks incorporate variables such as trading ranges, valuation metrics including trade-weighted indexes and trends in demand based on internal client orders to get a sense of which way markets are moving – and the potential impact of a new trade.

Nowadays, the models also incorporate sentiment analysis around news headlines and economic data surprises.

These electronic trading platforms also have years of financial data plugged into them with various kinds of scenario analyses, but one thing they have sometimes appeared unprepared for is a sudden change in policy direction.

Witness the market mayhem exacerbated by trend-following algorithms when Switzerland’s central bank scrapped its currency peg in 2015, or the taper tantrum in 2013 when the U.S. Federal Reserve said it would stop buying bonds.

Or Britain’s vote last year to leave the European Union.

Indeed, the biggest risk for financial markets cited by money managers in a Bank of America Merrill Lynch poll in October was a policy misstep from a major central bank.

 

EASY CREDIT, LOW VOLATILITY

One concern is that the rise in automation has coincided with a prolonged decline in market volatility as central banks from the United States to Japan have kept interest rates close to zero and spent trillions of dollars dragging long-term borrowing costs lower to try to reboot depressed economies.

While central banks have been careful to get their messages across as they end the years of stimulus, there are concerns about whether quantitative trading models can capture all the qualitative policy shifts.

For example, a growing number of investors expect the Bank of England to raise its benchmark interest rate to 0.5 percent on Nov. 2, and then leave it at that for the foreseeable future.

But futures markets are expecting another rate rise within six to nine months, injecting a new level of risk around interest rate moves and potentially boosting volatility.

Neale Jackson, a portfolio manager at 36 South Capital Advisors, a $750 million volatility hedge fund in London, said young traders have never seen an environment other than central banks supporting markets, and that has fueled risk-taking underpinned by the belief that “big brother has got our backs”.

“The problem these days is that there’s a whole generation of traders who have never seen interest rates, let alone interest rates hikes,” said Kevin Rodgers, a veteran FX trader and the author of “Why Aren’t They Shouting?”, a book about the computer revolution within financial markets.

 

(Additional reporting by Maiya Keidan and Simon Jessop; writing by Saikat Chatterjee; editing by Mike Dolan and David Clarke)

 

Wall Street swings in post-U.S. election rollercoaster

Traders work on the floor of the New York Stock Exchange

By Chuck Mikolajczak

NEW YORK (Reuters) – U.S. stocks were little changed on Wednesday, rebounding from stunning overnight losses fueled by the U.S. election as sectors that appeared poised to benefit from a Donald Trump presidency led the charge.

After tremendous losses in the overnight session, the Dow and S&P 500 briefly turned positive shortly after the open. Strong gains in the heavily weighted healthcare sector. SPXHC, up 2.9 percent, and financials. SPSY, up 2.5 percent, kept the market within striking distance of the unchanged level.

A curb on drug pricing was one of the key campaign themes for Democratic nominee Hillary Clinton, while Republican President-elect Donald Trump has called for repealing the Affordable Care Act and loosening restrictions on banks enacted after the financial crisis.

“There was the potential for, maybe not all the way to price controls, but certainly more pressure on some of the pharma names and that has likely gone away,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

“It remains to be seen what President Trump and the Republicans will do on the healthcare side, certainly that has been a drumbeat for eight years now about the repeal of Obamacare”

The Dow Jones industrial average. DJI rose 20.78 points, or 0.11 percent, to 18,353.52, the S&P 500 .SPX lost 2.1 points, or 0.1 percent, to 2,137.46 and the Nasdaq Composite dropped 12.34 points, or 0.24 percent, to 5,181.15.

Through the night, financial markets reacted violently to poll results and as Clinton’s path to victory narrowed. The S&P slid 5 percent and hit a limit down, meaning the contract could not trade lower, only sideways or up. Dow Industrials futures briefly fell 800 points.

Republicans also maintained their majorities in both chambers of the U.S. Congress, enabling the party to reshape Washington with two years of “unified” government.

“The reality is the President doesn’t dominate everything and we are still going to have a fairly split and divided Congress because even though the Republicans technically have control of the House and the Senate, they don’t have strong control,” said Jason Pride, director of investment strategy at Glenmede in Philadelphia.

“The lack of strong control kind of handicaps their ability to push through, or handicaps any one person, particularly the President’s ability, to push through extreme policies,” he said.

Wall Street is typically seen as preferring gridlock, or shared control of the White House and Congress, than a sweep of both chambers of Congress and the presidency.

The CBOE Volatility index futures shot nearly 40 percent higher at one point, reflecting investors’ reservations over a Trump presidency, but sharply retraced that advance after Trump’s acceptance speech. During the session the CBOE Volatility index. VIX was down 11.5 percent.

“Certainly (the trading floor) has a much different tone than what it did just several hours ago, but for now things remain very orderly and we would anticipate that tone to continue or improve as we get closer to the open,” said Ryan Larson, head of equity trading, U.S. at RBC Global Asset Management in Chicago, Illinois.

Big pharmaceutical names gained, with Pfizer PFE jumping 7.8 percent to $32.34. The iShares Nasdsaq Biotechnology ETF  climbed 7.2 percent and was on track for its biggest daily percentage gain in eight years.

(Additional reporting by Rodrigo Campos and Tanya Agrawal and Yashaswini Swamynathan; Editing by Chizu Nomiyama and Meredith Mazzilli)

U.S. voters look to game election system by ‘trading’ ballots

A voter wears a shirt with words from the United States Constitution while casting his ballot early as long lines of voters vote at the San Diego County Elections Office in San Diego, California,

By Joseph Ax

NEW YORK (Reuters) – Sophy Warner wanted to vote for third-party U.S. presidential candidate Jill Stein. But she worried that her ballot, cast in the swing state of Ohio, might help Republican Donald Trump capture the White House.

Through the website “Trump Traders,” the 20-year-old biology student at Cleveland State University got in touch with Marc Baluda, 44, a Republican corporate lawyer in California who opposes Trump’s candidacy and planned to vote for Democratic nominee Hillary Clinton.

The two strange bedfellows made a deal worthy of congressional horse-trading: Warner would vote for Clinton in Ohio, where polls show a tight race, while Baluda would cast a ballot for the Green Party candidate Stein in California, where Clinton is assured of winning the state’s electoral votes.

Tens of thousands of voters, the vast majority seeking to prevent a Trump presidency, have signed up on “vote-swapping” exchanges in advance of Tuesday’s Election Day. There is no way to verify the ballots are cast as agreed, though some people are taking “ballot selfies” in states where such photos are legal.

The swaps take advantage of a unique feature of U.S. presidential elections. The winner is decided not by the national popular vote. Rather, the outcome depends on what are known as electoral votes, which are awarded to the victor of each state’s presidential election, with rare exception.

The overall electoral vote winner becomes president, and the national contest thus often comes down to votes in a handful of states.

“Swing states” such as Ohio are hotly contested because their voters can swing either to Republicans or Democrats year after year and so play a decisive role. By contrast, pollsters view states such as California as reliably Democratic.

40,000 MATCHES

Trump Traders had matched 40,000 voters as of Monday, according to co-founder John Stubbs. Although that may be a small fraction of the electorate, a few hundred votes could make a difference in a state where the race is close.

The practice appears to be legal. In 2007, the 9th U.S. Circuit Court of Appeals in San Francisco ruled that swapping votes is a protected form of free speech, even if some disagreed with the tactic.

Vote trading first gained attention in 2000, when some voters sought to ensure Ralph Nader, the Green Party candidate, did not siphon off enough support from Democrat Al Gore to hand the election to Republican George W. Bush.

The so-called “Nader Traders” failed when Bush famously won the election after capturing Florida by only 537 votes. Nader drew more than 97,000 votes there.

Stein and Libertarian nominee Gary Johnson together are drawing nearly 7 percent in opinion polls, far more than normal for those parties and enough to raise the specter of another Nader-style outcome in 2016.

The digital exchanges seek to solve a quadrennial conundrum for voters “trapped” in one of the 40 or so noncompetitive states: how can I make my vote count?

For supporters of third-party candidates like Stein and Johnson who have almost no chance of capturing electoral votes, however, all that matters is their raw national totals.

That difference is what allows the type of vote trading that occurs on Trump Traders and #NeverTrump, a mobile app launched this fall by Silicon Valley entrepreneur Amit Kumar.

“Living in California, our votes aren’t that important in determining who wins,” he said in a phone interview.

Kumar said the app has been downloaded 20,000 times, with around 8,000 active users.

Trump Traders’ Stubbs, a Republican, said technology advances since 2000, including social networking sites and mobile phones, made vote-trading exponentially easier.

For Republican voters like Baluda, even saying aloud that he is supporting Clinton is difficult. But he said he had no regrets about trying to maximize the power of his vote by commoditizing it.

“Votes do matter, and Floridians found that out 16 years ago,” he said.

(Reporting by Joseph Ax; Editing by Howard Goller)