After the US Equity market closes, for example, until next day open, just curious to understand on what basis are US index futures deriving there value? Is it based on news events, if any? Or are they mainly deriving value based on how other major world indices open at the time are performing? Thx
People are trading the perceived FUTURE value of the index and not the actual value of an equity market.
Traders place trades based on what they believe the market will do in the future. That's why they are called futures contracts.
Some may use technical analysis, others might use fundamentals while others in the market might just be taking advantage of short-term momentum. Hell, there may be people placing trades based on the moon phase or zodiac signs. BTW- If you are drinking a lot schizo you might want to look into using Milk Thistle as a supplement. https://www.webmd.com/digestive-disorders/milk-thistle-benefits-and-side-effects
Perceived value is really just a subjectively derived idea. But people make a lot of money on what others subjectively assume is true. Take religion as an example. Billions of dollars are collected in Churches because people have been led to believe certain dogma. I’ve yet to meet anyone who can prove their assertions, but the power of belief is strong enough to influence actions. So really, regardless of how our beliefs are derived, we’re all just betting on our beliefs being true. If for only a moment of time. Not picking on Religion, but the markets are closed because of..uuum Religion..so.
Few things that I paid attention during the overnight ES and NQ session such as: Asia market (Japan, HK) open, London, Dax market open and DXY.
So let's say the spot is easily tradable and the spot is $1000. For a clean argument, let's say the interest rate is 10%. So fair value would be $1100. We observe the future is trading at $1108 at the close. So it's trading at $8 over fair value. Let's, call the $8 Alpha. So overnight the $100 carry would erode by one day. Now let's look at $8 Alpha or as some would call it sentiment. Could something overnight impact the sentiment? Sure - why not? How big or small could the sentiment be? Well first it's gonna converge to spot at the end. Could it go to $1500 - first assumtion was spot is easily tradeable so large investors would buy spot and sell the $1500 future. Could this whole thing go wrong? Sure and the most common is when the inability to trade spot occurs. Isn't this fair value what everyone quotes at S&P settlement? Yeah, but the S@P is a net carry, because the spot receives some cash flow in. If this correct how did the crude contract go negative - you can't trade the spot and only a handful of firms can. Those firms have a massive edge at times like that. What if my sentiment is different from the next guy or the market - you know have the basis for a trade. So what impact overnight - cost of money - cash in if any - changes in the Alpha/Sentiment? Spot demand/supply by the user community.