The parent company which owns the well-known exchanges such Chicago Mercantile Exchange (CME), Chicago Board of trade (CBOT) and the New York Mercantile Exchange (NYMEX) will update the market this week. The recent jump in volatility and trading volumes should lead to an increase in income.
CME Group is the largest futures market operator in the world, and the very nature of its business means when financial markets are choppy its earnings improve. In July the volatility index dropped to its lowest level in 2014, and it is no coincidence that July also saw the largest number of short positions being taken out on the share price of CME Group. Since July, the number of short positions on the stock has decreased by 17%.
Fear was injected into the markets in October when macro issues like Ebola, eurozone bond yields and Chinese growth dominated the headlines. This surge in trading activity pushed the stock higher by 1.3% over the month while the S&P 500 increased by 0.3%.
October is an important month for the financial markets as the Federal Reserve is expected to wrap up its bond-buying scheme. CME’s executive chairman Terry Duffy believes a ‘tremendous’ number of dealers are waiting on the sidelines for the stimulus package to finish before returning to trading activity. When quantitative easing comes to an end the focus will be turned to interest rates, and last week the company had a record day for volumes in interest rate derivatives.
CME Group is one of the few financial firms that benefited from tighter regulation. Following the credit crisis some major banks have moved away from over the counter (OTC) products and are using standardised derivatives. CME’s clearing service has witnessed an increase in business as more OTC derivatives are being cleared through its house.
The group is looking to expand its presence in Asia and is considering buying a 2.5% stake in the Korea Exchange (KRX), even though the South Korean government effectively controls the exchange. Deutsche Borse and Standard & Poor’s have also expressed interest in the stake. Next week, CME Group and KRX are expected to announce a new venture which will offer derivatives trading on the South Korean won outside of the local market hours.
The consensus for the group’s third-quarter revenue is $766 million and earnings per share (EPS) of $0.82, compared with its second-quarter revenue and EPS of $731 million and $0.77. In the third quarter of 2013 revenue rose by 4.6% to $714.6 million and EPS increased by 8.2% to $0.75.
The 50-day moving average is providing support at $78.91, and the next support level below that is $76. Robust numbers would put the recent high of $83.63 in sight, and then the next target is the 2013 high of $84.69.