At a Glance
- Overnight futures activity gets a bigger spotlight at times of major market volatility
- Over a three-day period in March, the S&P 500 had four 5% moves outside of U.S. trading hours
Thus far, 2020 has been a wild ride in the equity markets. The current volatility is different from past events in that, for the first time in my lifetime, it has been primarily driven by an exogenous factor in the form of a pandemic. Previous large negative market events were usually driven by domestic credit bubbles bursting.
The fact that this story is global also changes the way markets digest new information and adjust accordingly. If the story is domestic, it would stand to reason that headlines would have a tendency to break during U.S. trading hours.
However, this story is global and headlines break at all hours. Between Sunday evening, March 15 and Wednesday morning, March 18th, the S&P 500 had four different 5% moves that occurred outside of U.S. market hours. Several of the biggest market headlines in 2020 have occurred over the weekend and resulted in enormous Sunday evening market volatility.
On Sunday March 8, the announcement of a crude oil price war between Saudi Arabia and Russia hit the tape and caused both oil and equities to tumble. When futures markets opened on Sunday night, crude opened down almost 20%.
On Sunday March 15, the Federal Reserve announced a full point rate cut and $700 billion in quantitative easing. Sunday night futures played a critical role in determining how the market was to ultimately react to this news.
Throughout the many large market fluctuations in March, overnight futures trading has received special attention, particularly in the equities markets. When a large move up or down occurs in the round-the-clock futures market, it is often reflected once the cash markets open at 9:30 a.m. ET.
The point is that greater access to liquid markets is certainly a net positive in most market conditions, but this advantage is particularly stark during a highly stressed environment. The CME E-Mini S&P 500 contract trades 10x the notional value of its ETF counterpart on a daily basis. Similar ratios hold true for the CME E-Mini Nasdaq 100. The Micro E-Mini index contracts also trade with good, round-the-clock liquidity.
The latest volatility has been stunning and unprecedented for several reasons. On January 17, the VIX volatility index was trading at $12.10 and by March 16, it closed at $82.69.
To put this in a historical perspective, this is higher than the highest closing level reached during the Great Recession of 2008 and almost twice the top reached during the “tech wreck” of 2001. This volatility is in conjunction with about a 25% decline in the S&P 500 as of March 19.
I point out this fact to emphasize that this higher volatility is occurring in a comparatively smaller overall market plunge. This could change by the time you’re reading this, but the current major market moves have been in both directions as information about the response to the coronavirus pandemic unfolds.
CME Group also has liquid contracts in crude oil, gold and treasuries, all of which have been greatly affected by the current market volatility, often in overnight U.S market hours.
The transition of trading from exclusively “market hours” to “around-the-clock” has been going on for many years, but at certain moments the advantages of broader access in futures becomes particularly clear. It is the reason why, especially in times when the markets are a major part of a broader international event, observers look to futures first to learn how news is being digested by the global financial markets.