When the S&P/ASX 200 index plunged 50 points on Wednesday morning, traders raised their eyebrows.
It wasn’t the size of the fall. In what has been a largely becalmed sharemarket, a fall of that magnitude is unusual but not extraordinary. Instead what grabbed market observers’ attention was that the drop was, once again, sharply out of line with the overnight trade in ASX futures.
The offshore buying and selling in ASX 200 futures contracts, known as the SPI, is usually a reliable indicator of where the market will open come 10am in Sydney. Recently, however, the SPI has proved more of a counter-indicator.
“It is unusual,” CMC Markets strategist Michael McCarthy said, referring to the recently diminished ability of overnight futures markets to pick the ASX open.
“Anecdotally, nine days out of 10 futures provide a reasonable lead to at least the opening impulse on the market,” Mr McCarthy, a veteran trader, said. “They don’t always predict the close well, but they generally predict the opening impulse well and that hasn’t been the case this week.”
Indeed, Mr McCarthy argues this phenomenon has been in place “since the beginning of September”.
While overnight trade in futures is a better guide to the early direction of the ASX trading session, it does also predict to some degree which direction the market will have moved by close.
Exclusive research by Fairfax Media, using Bloomberg data, shows overnight trade in the ASX 200 futures contract has predicted the direction of the benchmark index the following day about 60 per cent of the time over the past five years.
So far this year, the day’s trade on the ASX has followed the overnight futures lead only 55 per cent of the time. The equivalent figure in August and September is even lower, at 43 per cent of the time in each of the months.
Offshore hedge funds active
Mr McCarthy sees the hand of offshore hedge funds as a way to explain the fact that the ASX has been so wildly out of whack with the overnight lead of late.
“I’m pretty confident it’s international investors, and it looks to me like a currency view rather than a view on the Australian economy or the sharemarket itself,” he said.
“From my analysis on Tuesday, short positions in a number of the top 20 stocks had increased by between 2 and 4 per cent. So from 14 per cent short-sold, to 17 per cent, that sort of thing.”
“It’s a common strategy among hedge funds,” he added. “They sell the local sharemarket to give them the potential of a double win, because generally a declining currency would see a declining sharemarket as well.”
Bell Potter head of institutional sales Richard Coppleson also mounts a case for offshore intervention.
“Maybe after the RBA comments [on Tuesday] that shook someone into acting,” Mr Coppleson wrote on Wednesday.
“If international investors think for one second that the [Aussie dollar] is going lower, then they will sell Australia,” he wrote to clients on Wednesday evening. “They like to buy when [the dollar] is going up and sell when the [dollar] is going down.”
“So clearly some have taken the view it’s due for a fall.”