The ASX200 rallied 0.35% on Monday which was a reasonable effort considering the Banking Sector closed in the red although heavyweight CBA did manage to finish marginally higher. At both midday and 4pm I felt the market was off and running for its annual Christmas Rally but alas aggressive selling in the futures market after 4pm led to a very poor match which saw local stocks lose almost half of the day’s gains in one fell swoop, looking at US stocks overnight it looks like somebody called things correctly:
- When large moves in the SPI futures unfold between 4 and 4.10pm, as stocks sit in limbo waiting for their final trade, we can get large “gap” moves such as yesterday due to arbitrage between the futures and stocks.
- One SPI futures contract is the equivalent to a basket of ASX200 shares valued at the index x $25 i.e. at yesterdays close of 7380 one contract equals $184,500.
- If as we saw yesterday arbitrageurs can buy over 2,000 SPI futures contracts ($369m worth) at a 20-point discount to fair value / where they were trading at 4pm they will do so and “dump” the equivalent $$ worth of stock in the match hitting the ASX200 in the process.
- They will then hold this position until the ASX enjoys an optimistic period when the SPI is trading above fair value on decent volume when they will simply unwind the position locking in the margin.
As we head into Christmas corporate activity appears alive and well, I’m not sure if it’s a sign of strong liquidity driving ongoing M&A into 2022 or a last ditch attempt by suitors to take advantage of low interest rates before its too late but either way its creating a tailwind for stocks until further notice – yesterday alone saw the likes of CSL Ltd (CSL), Virtus Health (VRT), Ramsay Healthcare (RHC), BHP / Fortescue and Senex Energy (SXY) involved in the deal making merry-go-round on one level or another. We mentioned the M2 Money Supply Index in yesterdays Macro Monday Report with all indications at the moment that there’s still plenty of cheap cash looking for a home creating a deal makers paradise.
US equities reversed sharply lower in the early hours this morning as markets adopted a “risk-off” attitude, selling was focused in tech names while bonds rallied taking the likes of the Utilities and Real Estate along for the ride. The SPI futures are calling the ASX200 to surrender all of Mondays gains plus a little more. Markets hate uncertainty and this week we have a whopping 20 central banks around the world due to deliver monetary policy decisions with rising inflation likely to be on most of their minds i.e. more aggressive tapering of stimulus poses a clear risk to asset prices.
MM remains bullish the ASX targeting fresh highs into 2022
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