Home > Markets > Index Futures > ES→SPX ≈ 3pts! Here comes the interest rates!

ES→SPX ≈ 3pts! Here comes the interest rates!

  1. The front-month ES future could be had at a 2pt discount to the SPX last week.

    It's now varying ~3.00-3.50!

    That's the December FED rate hike, and the BOE hike from this week, at work.


    If your favorite trades concern "time" or "interest rates" in any significant way, you'd want to be aware of that capitalization, because it will end up in the market you're in now.
     
  2. Extremely vague. Please explain more fully so that readers can understand what you are getting at.
     
  3. You're assuming he himself understands what he's talking about...
     
  4. That may be true surf.
     
  5. Oh, he knows. I suspect typing speed is a factor--i.e. if he typed faster, he'd offer more detailed explanations...I suspect there's a lot of information from a lot of users that goes unsaid on this forum for that reason alone.

    But you both read charts--it shouldn't be difficult to draw reasonable inferences from something written in english.
     
  6. Surf and I are not the only readers of this posting.
     
  7. o_O

    Well, that's about as compelling a reason to doubt my post as any...So for clarity sake, I meant to imply, "we all read charts..."
     
  8. No--we do not all read charts. In fact there may be a lot of folks reading who haven't started trading yet but would like to understand the discussion.
     
  9. Yeah, good point. But I suspect anyone who would be sufficiently aware of the concept in the post would also be proficient in charts...
     
  10. What percentage of folks reading understand the concept?
     
  11. That answer would probably say more about my faith in humanity than accurate reflecting typical comprehension levels.
     
  12. Nah, the majority of the basis variation comes from dividends dropping off. The effect of expected changes in rates is very minor.
    Simple math - 1 point of SPX basis is about 4 bps. Dec FOMC is on 12th, say there are 10 days left from it to expiration. That would mean that a 1 pt change in basis implies an over a 100bp change in interest rate.
     
  13. It is either caused by dividend or interest rate. I looked at the CME FOMC tool but I think nothing had really changed in rate hike probability?
     
  14. Says the guy whose half of his posts is one word: FALSE as an argument. :)
     
  15. While I agree whole-heartedly with the observation (especially as I had completely forgotten this sort-of effect :rolleyes: ), I am troubled by the fact that I've been watching ES→SPX for years and years, and have only recently seen the discount *increase* as the ES aged. (Recently being..... the last 6 months? maybe 9?? That would cover MAR/JUN/SEP..... +/- DEC.....) Every other ES expiry (as remembered) was a monotonic decline.

    Funky. Thanks for the post, sle -- I'll be looking for more evidence (and keeping my ears open and eyes peeled) going forward.
     
  16. And this morning, we're back to nearly 2.00 pts between 'em.

    One month to go; still seems a bit low for the last decade, but about 'as expected' for the last 4Qs.
     
  17. I ain't an expert, but I would agree with sle... Interest rates don't really make that much of a difference, while dividends do. Looking where the divvy futures are, it would seem that it's all fair.
     
  18. cash 2568.86
    DEC 2567.50
    1.36pts., with ~ one month to go.
     
  19. Vague as the Las Vegas shooter police report.
     
  20. YOW! On the eave of a tax bill vote,
    cash 2583.03
    DEC 2582.35
    0.68 pts., with that one month to go.
     
  21. YOWZA.

    SPX 2639.75
    ES 2640.50

    The ES future is $0.75 ABOVE the market.

    Two calendar weeks to go.
    Ain't never seen that.
     
  22. AND NOW?!?!?

    SPX 2656.00
    ESMar 2659.00
    -------------------------
    discount -$3.00

    That is not dividend payments. My original thesis (is that this is a capitalization of interest rate expectations over the next months) holds up some better -- but a quarter-point?? A half?!?
    Earnings doesn't do it either, as that should be in the current price, not the future.
    What about U.S. taxation?!? Again, how does that not get exactly, evenly shared between the future contract and the current pricing?

    Whacky. I've only seen (+)7-8 SPX points in a decade or so of comparison. (I'd love to see some exact numbers, just to see how closely my memory comports with reality...)
    Sheeesh.
     
  23. How could this be?....50% of ET posters (or 100% of my ignore list) tell me the FED and it's influence on borrowing rates has no effect on the economy.
     
  24. this is very common actually.

    we call the 'normal' curve.
    ie futures with longer expiration date has higher price.
    the opposite is 'inverted' curve.
    at times we do see combination of normal and inverted curve.

    see this:
    ES Z17 - 2662
    ES H18 - 2665
    ES Z18 - 2671
     

  25. No, it's most certainly not common for the SPX/ES.
    As noted above, the average turnover saw ~ minus 7-8 pts with a new front month.
    For the S&P right now, at 2663.5, the ES Mar'18 contract was ~ 3.25 pts higher throughout the day -- not at 2655, but 2666. There's a positive 3 pts.

    To flip backwardation to contango, the fundamental equations for future contracts must have their parameters flipped, from positive to negative. This is big news, that until today (on CNBC) I had not heard anyone discussing. (It's been developing for weeks -- funky things from Labor Day on -- 3 months??) I severely doubt that dividends (and holding costs) have changed much, but boyyyyyy that parameter on interest rates has moved.

    (And so we're back to my original thesis. Sheeesh. :cool: )
     
  26. Confused by the OP.

    Do you mean time value of money and opportunity cost of the cash?

    When holding a futures position, in lieu of a debit cash position in the S&P like SPY, the positive cash position by holding futures allows you to earn a risk free rate with the cash at hand, which is marked to the fed funds rate. So, if the fed raises rates, presumably the cash holder in the futures contract gets more risk free interest return on that cash than before. This ought to reflect in the pricing of the derivatives contract. As such, the futures contract should be priced lower than spot in the cash market, due to interest returns when holding futures and keeping all the cash, and priced lower still when the fed raises rates. So, because the negative spread between futures and cash market is increasing, you're saying the market is pricing in high odds of interest increase as time goes on (isolating it to interest effects)?

    Is that what you meant by the OP?
     
  27. Our futures had been in backwardation for a long time -- this move to contango got my attention.

    Less than figuring out the structural equation changes needed to see such results, I was just trying to identify the current, real-world changes going on.

    There are some markets out there that have never seen a flip. (I did a Google tour last week?? And one of the best issue *summaries* was of the Nifty -- so not immediately relevant to US markets vis-a-vis the Fed.)

    Lastly (although, still 'surprisingly' to me), the popular press (by which I mean, CNBC and Yahoo!Finance [yukyukyuk, sure]) were seeming to catch up to this in commentary both on-air and in print.

    What *I* would really like to see, is the front-month difference to fair value, over a goodly chunk of time -- like, 1960→2017. I know it's got to be out there -- I bet it would inform the conversations nicely.
     
  28. I saw the ES 6pts above the SPX earlier this week -- now it's about 0.30 pts above, and has been that way all morning.

    Never seen this. Don't have an explanation for the flopitude. Front-month for a fresh ES future should be about 7pts below at the start (*now* for Mar18).

    Woof! The ES is 2684.25; the SPX is 2684.00. A quarter-point.

    "Stay tuned!" is all I can say..... :cool:
     
  29. SPX 2684.40
    ES 2684.38.

    The ES has now flashed a return below the SPX. (Meh. It was about 2 minutes. Then it was gone. Now, it's back (2¢!). Now, it's gone. [Fascinating, right?])

    I have a very straw, Straw Man that says "Yes, this is interest rates" but that the compounding/twisting thing here is now *tax* rates, too. So, call it *effective* interest rates.

    I guess that's why it pays to keep yer eyes open.....

    Ooop. ES now 9¢ below the SPX. H'ain't seen that inna while.