Should You Use Equity Futures Prices To Analyse Currencies?

It's best to use both futures and the underlying price when analysing equities. Stock markets close while futures markets trade 24 hours a day. This provides a smoother view of how equities are being priced.
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Equity Futures Prices – Currency Analysis

A question here from Stewart saying that sometimes we use equity futures rather than the underlying equities in our analysis. And he asked why we did that? Now we do use both for the exact same reason, really as a good gauge of the overall market sentiment.

If we get down into the technicalities it’s really quite simple why we try to use both of them, as you know, the underlying indices only trade when their corresponding exchanges are open, for example, the Nikkei 225 will only trade while the Tokyo Stock Exchange is open the DAX will only trade while Frankfurt is open and the S&P 500 will only trade while the New York Stock Exchange is open.

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So usually we just look at the current underlying equities that are open to get a sense of the mood of the market during that session. Now the cool part about the futures market, in terms of equities, looking at this example, is that they basically trade 24 hours a day.

Even though there is a slight difference between the futures price and the actual underlying price, it is close enough, for the purposes that we use it for. So instead of looking at, just for example today, we’re currently trading in the London Session, instead of just looking at the EMEA indices, during the London Session, we can look at the futures market, to get a broad sense of what ASIAPAC, as well as New York indices are currently doing, to get a broader sense of the overall risk appetite in equities.

Now, sometimes they might be, something that affects only equities in a particular country or a particular session. For example, European underlying equities, might be trading all red across the board due to something particular to European stocks itself.

But when you have New York open, you basically see the New York trading session or the New York indices or equities, basically unaffected and trading all green across the board. So in those cases, looking at the futures markets can give you a sense of whether what is driving a particular equity, a move in the market, is spilling over into the other regions as well, or whether it’s just specific to a particular session. So in those cases, you might see ASIAPAC red across the board, but you might see European and New York trading station indices trading green across the board, just as an example.

So, that is the only real difference for why we choose to look at both of them. You can look at either one or the other. There’s no real secret sauce between them.

That’s basically just the quick answer for why we like to look at both of them when we do our overall risk sentiment analysis.

 

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