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How do Debt Futures and Stock Index Futures React to FOMC/ FED statement
I'm pretty new here. I hope to meet and learn from all of you great minds. Anyways my question today is how do FOMC / Fed Statements affect the US Fixed Income Futures (US 5YR & 10YR especially) and major US Stock Indices? For example if I remember properly, in the September 17th 2015 Fed meeting since they signaled a dovish move the Fixed Income Futures rallied while Indices fell. Now in pure Economic terms how is this possible? Shouldn't a neutral move retain the market unchanged?
And also going forward if they announce more QE is necessary in the December meeting, would that make Stock Index contracts for months of Z and H rally while the current bond futures fall?
And if they signaled a hike would that make the indices for Z and H months fall while the bond futures for those months rally?
I'm pretty confused. So any help from you guys is highly appreciated and also shout out to big Mike.
Can you help answer these questions from other members on NexusFi?
1) in general when interest raises significantly, that makes equity less attractive,
my personal view is that , when interest rates increase from current unrealistic levels, the fixed
income products don't yet give you an alternative to equity, as that is what historically driving
money to flow form equity to fixed
2) if interest rates go up, even a small increase on the yield, that will make bonds drop, the
reason is that the bond is less attractive and the difference in interest rate to the yield
for the same maturity, multiplied with the maturity in years, is what the price will drop
on average
if interest rates are going up, bond prices go down
3) a much more difficult aspect is, how much of the expectation is discounted in the equity
market, as a result, unexpected changes in interests make the market react aggressively
a change in an expected direction, might have the opposite result, as all people already
toke positions in that direction and need to unwind after the news
There is no algebraic formula, but i hope this give you a first help into the right direction...
thank you for your comment. I do understand those economic concepts but I find it difficult to apply it to futures markets themselves.
Simply, what does it mean if the Fed decides to hike in the December meeting, say like 25 basis points. What does it meant to Index Futures and Debt Futures? and does the contract month matter at all on how drastic the movement is going to be, does the rate sensitivity of the product matter at all.
For instance, as I mentioned earlier if the Fed hikes by 25 basis points in December does that mean we get to see a severe drop in the US 10YR March contract than the December Contract? So I'm assuming these actions will also cause the equity futures to drop because the money is pulled out of equities into bonds?
And how would this activity influence the European indices such as the DAX, FESX, FSTX and Fixed income products such as the Bund, the Bobl, since Europe is ahead of time than the United States are the prices going to be already discounted in these products before the Fed meeting? Assuming that EUREX is already closed during the meeting.
My last question is on an ordinary day are the ES, YM and the NQ more likely to follow and trace what happened in European equities overnight and take a similar move during the day or is it strongly based on daily US equity trading and CL?
If interest goes up, the equity market should go down, or at least the momentum should reduce in general.
However, with those very low interest rates and investments coming to maturity that need to be reinvested
the question is, in what asset class to invest ? Fixed income (especially for people who need to live from their
savings, don't offer a lot of options, unless you go for exotic currencies, which then implies a currency risk)
Secondly, the FED has trying to do a lot of step-by-step communication,so that a first interest rate hike
does not come as a surprise. The reaction of the drop in equities could very well be limited to nihil...
A rate hike of 25 basis points translates in 2.5% drop in the bonds price with a maturity of 10Yr
there is no magic here, it's simple mathematics in calculating the actual yield.
the futures will just move based on the bonds
probably you are best to stick to front month because of liquidity.
there can be contango/backwardation on the other contracts, but that is another discussion.
An increase of the rate in US$ will make the US$ more attractive compared to the EUR
This is an element that creates a flow of money from EUR to US$ on the high level
on the lower level the money needs to be parked into an asset class:
- cash
- bond
- equity
- property
There are off course other elements that define the flow from and to US$
the net balance makes the result.
The ES, YM, NQ move in general on the bigger picture money flow.
