Derivatives trading has been volatile and volume has been high for a second week running, after the agreement of a euro zone debt rescue package last weekend and the formation of a new government in the UK.
But volume has fallen from the highs of last week and markets appear to be calming down.
After hitting a daily record of nearly 3m contracts last week, trading in Liffe’s Three Month Euro (Euribor) Futures remained high this week. A total of 2.3m contracts were exchanged on Monday, 1.1m on Tuesday and 1.3m on Wednesday. Open interest was highest in the June 2010 contract, at 883,000, followed by September, with 780,000.
The turmoil in the euro has led to high volatility in currency contracts. Foreign exchange throughput at CME Group set a daily record of 2.37m contracts last Thursday (May 6) and remained high the next day. Volume fell to 1.44m on Monday and had returned to more normal levels by Wednesday.
Richard Wiltshire, chief foreign exchange dealer at ETX Capital in London, said yesterday (May 13): “In the days since the [May 6] election the pound staged what looked like a recovery. However, it was short lived, as risk appetite all but disappeared today and sentiment for recovery is clearly weak and getting weaker.”
He added: “As Greece approaches refinancing next week, investors will likely retain a cautious stance. The wider issue for the euro at present is structural outflows by long term fixed income investors who seek to remove exposure altogether.”
This week ended badly for the euro. After a precipitate fall against the dollar last week from more than $1.32 to $1.27, the euro rallied until Tuesday, reaching $1.29. But it then fell back to $1.2655 on Thursday – a new 14 month low.
It was just as bad for the pound. It fell from $1.483 on Wednesday afternoon to $1.465 on Thursday.
The European government debt bailout in the early hours of Monday morning had a positive effect on European stock index futures.
At Eurex, the Euro Stoxx 50 Future for June expiry was €2,747 on Thursday May 13, up by about 300 points from the end of last week. The price was €2,743 for the September contract and €2,730 for the December contract, which implies only a slight decline in the index over the next seven months from Thursday’s closing level of 2,764.
Liffe’s FTSE 100 Futures prices rose significantly from last Friday, when the UK’s indecisive election results were made public and there was uncertainty as to which parties might form a government.
The underlying index was at 5,433 on May 13, up from 5,123 last Friday. The June 2010 future was 5,411, the September expiry 5,365 and the March 2011 at 5,290, which suggests that investors believe the index value will decline slightly over the next year.
CME Group’s Eurodollar contracts on short term US interest rates touched volumes of 6.7m and 6.31m contracts on May 6 and May 7, more than double the average daily volume in May 2009.
On Monday, afer the euro zone bailout was agreed, a total of 4.47m contracts were traded. Trading has calmed down since then, with 2.98m contracts traded on Thursday.