Futures Markets Confused While Waiting for Debt Ceiling Outcome
By David Pappas, Archer Financial Services
Until just recently, stock index futures have been taking it on the chin. The S&P 500 futures weekly continuation chart below shows that futures have been locked in a broad trading range for the past seven months. In this period, there has been no follow through in either direction, while traders attempt to process the myriad of domestic and international news.
S&P 500 Futures - Weekly Continuation
Chart provide by APEX
As you can see, we started the beginning of 2011 with a continuation of the rally that took place in 2010, but futures quickly sold off in March. Some of the reasons for the selling pressure were:
1. Spain's sovereign debt rating was downgraded to Aa2 by Moody's Investors Service, with a negative outlook.
2. Greece, on March 10, 2011 asked European Union and European Central Bank leaders to address problems created by rating agencies for countries struggling with debt. This was just days after Moody's downgraded Greek debt by three notches.
3. China reported an unexpected $7.3 billion trade deficit in February, which compares to the $6.5 billion surplus in January. The median estimate in a Bloomberg News survey called for a $4.9 billion surplus.
The financial problems that Greece was having then and still has are prompting renewed calls for a financial assistance package. Whether or not Greece receives a bailout has become a major concern for the global economy. The proposed bailout for Greece started at $90 billion and has risen to $142 billion. There are reports that the International Monetary Fund asked Athens to raise sales tax, eliminate bonuses in the public sector and accept a three-year pay freeze. This was inacceptable to union workers, which prompted rioting in Athens. Waiting for a bailout produced emotional turmoil for the citizens of Greece.
Although Greece has been in the media most recently about its financial problems, it is not the only European country contending with severe financial strains. Other euro zone countries with financial problems are Portugal, Ireland, Italy and Spain.
It is not only the financial problems in the euro area that have stymied the price advance in stock index futures. There are other factors contributing to U.S. equity futures market swings. In addition to Greece's financial problems, we are currently waiting for a debt ceiling compromise between Republicans and Democrats.
Some in the media are speculating that if the debt ceiling is not raised, social security payments would be at risk and checks will not be sent. President Obama and White House press secretary Jay Carney stated there may not be enough money in the coffers. White House Press Secretary Jay Carney told reporters, "We can't guarantee - if there were a default - any specific bill would be paid."
There are other views that are not as pessimistic. For example, The Market Ticker said, "There is no shortage of funds to pay Social Security and Medicare under the existing debt ceiling. In fact, the Treasury could pay those benefits even if there was zero tax collected from any one in this country for Social Security and Medicare - such as if unemployment was 100% - for a period of more than three years, and not violate the debt ceiling.
With all of the conflicting views about the federal debt ceiling negotiations, it is no wonder that traders are confused and stock index futures remain in a trading range.
I believe U.S. markets will become very volatile over the next couple of months. I suggest using options to help limit risk. Please give me a call or e-mail if you would like to discuss trading strategies. I can be reached at 1.312.242.7960 and david.pappas@archerfinancials.com.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
