Uncertain Macroeconomic Environment Is A Boon For CME

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In its recent Q2 earnings release, CME Group (NASDAQ: CME) reported strong revenue growth of 20% (y-o-y), supported by heightened trading activity. Notably, the second quarter of the year was characterized by continued global macroeconomic uncertainty ignited by the U.S.-China trade war, potential currency devaluation by central banks, and the Iranian crisis. All these events prompted individuals and corporations to hedge against market risks – something that, in turn, boosted CME Group’s revenues.

Trefis captures trends in CME Group’s earnings over recent quarter in an interactive dashboard. You can modify key drivers of CME’s revenues and observe their impact on the company’s shares price estimate. Additionally, you can find more of our Financial Services data here.

A Quick Look at CME Group’s Revenues

CME reported $4.30 billion in Total Revenues in Fiscal 2018. This included three revenue streams.

  • Clearing and Transaction Fees: $3.6 billion in FY2018 (85% of Total Revenues). It comprises of CME’s electronic trading fees, private transaction surcharge, and other volume-related charges.
  • Market Data and Information Services: $450 million in FY2018 (10% of Total Revenues). It comprises of data distribution revenues from subscribers.
  • Other Revenues: $193 million in FY2018 (5% of Total Revenues). It includes income from access and communication fees, NEX’s risk management services and post-trade services.

Understanding The Link Between Macroeconomic Uncertainty & CME’s Revenues

CME’s clearing and transaction revenues contribute nearly 70% of the company’s value. And its derivatives exchange business is central to the transaction revenues and provides benchmark products across six asset classes: interest rates, equity indexes, foreign exchange, agricultural commodities, energy, and metals. As all investment hedges make use of derivatives in at least one of these asset classes, a situation where economic growth prospects look uncertain directly drive transaction volumes for CME.

To put things in perspective, CME’s total average daily volume sequentially increased by 12% to 21 million contracts in the second quarter. But after July 31, the total average daily volumes increased substantially to nearly 30 million contracts in the first week of August. Trading volumes have been increasing for interest rate contracts, equity indexes, and agricultural commodities in particular.

We believe that CME Group’s stock will benefit from the unresolved trade deal and central bank actions until the U.S. presidential elections next year. The key events that point to higher transaction volumes in the near future are:

  • The U.S. has imposed a 25% tariff on $250 billion of Chinese goods and has proposed a 10% tariff on the remaining $300 billion of Chinese goods in a two-part process effective in September and December, should a resolution be not reached.
  • Moreover, China refrained from purchasing American agricultural products, which were a cornerstone of the deal offered by the U.S., and lowered the odds of a resolution in the near term.
  • Per recent reports, the next set of trade talks are scheduled in September and President Donald Trump has hinted on canceling the meet.
  • In the U.S., the FOMC lowered funds rate for the first time since 2008 in its July meeting. With the U.S.-China trade war resulting in a currency war, various global brokerages are expecting further cuts in the benchmark interest rate later the year.
  • Globally, the S&P500 and Shanghai Composite have dropped by 2% and 4% since the beginning of the month, respectively. Moreover, recessionary fear looms over other parts of the world with FTSE and Nikkei dropping by 5% and 4%, respectively

Considering higher volatility for most asset classes, we have revised our valuation for CME Group’s stock upwards to $183. Our new price estimate remains 15% lower than the current market price.

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