Even when “the markets” purportedly freak out over exasperating political headlines and the impassivity of Congressional adversaries, only a tiny, unappointed cohort of traders presumes to express alarm on behalf of investors.
Small, fleeting trades in off-hours or obscure corners of the markets are commonly cited as proof of Wall Street’s assertive reaction to developments such as the government shutdown or impending debt-limit deadline.
But while the trades count and the prices to some degree reflect the new information, those calling in the buy and sell orders hardly amount to a representative quorum of market players.
The weekend action
Consider the action of this past weekend, when Congress (more or less predictably) failed to knit together an agreement to avoid a government shutdown before the end of its fiscal year. When the CME Group’s (CME) Globex electronic exchange opened for trading Sunday evening, the E-Mini S&P 500 stock-index futures immediately gapped lower by almost exactly 1% from Friday’s closing level of 1,691.
This was instantly cited as the stirrings of a Wall Street tantrum at the abiding dysfunction of Washington, once again creating an unnecessary drag on a slowly healing economy. Yet that initial burst of trading came on a typically trivial amount of volume for the late Sunday session. According to Hamzei Analytics, a futures-trading and research firm, the downward gap came on a total of 9,188 E-Mini S&P contracts, and then activity largely went quiet aside from small after-bursts that moved prices little.
For some perspective, in a typical trading day the E-Mini – one of the most traded and liquid instruments on the planet – will trade 1.5 million contracts or more. Each index point is worth $50 in the E-Mini contract, so each one has a nominal value, at Sunday night’s prices, of less than $85,000 apiece. The total value underlying those 9,188 contracts, then, is less than $800 million, and the actual financial exposure involved is a fraction of that: Cash margin required in a futures account, per $80,000 contract, is less than $4,000.
The value of the companies in the S&P 500, meantime, is nearly $16 trillion, and the value of their shares traded can easily reach $100 billion in a given day.
Again, it doesn’t make the quicksilver off-hours move illegitimate at all. These moves are a good reflection of the market price for big stocks among short-term traders at that moment in time. But, in a case such as this, the traders active in the market are essentially making a gambit based on educated guesses about how the investing crowd might react to the news the next morning.
Early Monday, Larry McMillan of options-research firm McMillan Analysis, wrote to clients that futures remained down almost 1% “supposedly because traders are suddenly worried about the U.S. government shutdown. Where were these sellers last week? What has changed in the way Congress is approaching this deadline? Nothing, that’s what.”
Perhaps unsurprisingly, the actual S&P 500 index in regular trading Monday never fell below the Sunday-night low, and by late Tuesday morning – with the shutdown in effect – it was back above Friday’s closing level.
Even less relevant, despite the alarmed attention it has received, is the recent rise in the cost to insure an investor against a default by the U.S. on Treasury securities. Prices for so-called credit default swaps on Treasuries doubled in the past several weeks, though remain low at around 0.4% of the principal amount insured.
Yet this is such a minuscule market, and the idea that the Treasury would ever truly let outstanding securities go unpaid despite its dollar-printing powers is far-fetched. According to securities-industry clearinghouse DTCC, there have been no more than 1,084 contracts outstanding all year, and recently there were fewer than 900. Many weeks, no contracts trade at all. The net underlying value of all Treasuries covered by current outstanding U.S. sovereign CDS is $3.1 billion. The value of U.S. government debt held by the public: $12 trillion.
This is really a tangential market used by fixed-income professionals, in tandem with other instruments, to express a technical view on minute changes in the future direction of the perception of the creditworthiness of the U.S. government.
Want to know something more important about the market’s view of whether America will pay its debts? The 10-year Treasury yields a mere 2.63%.