Category Archives: futures markets

Chinese economy, futures markets, stock market forecasts

China Update – The Beatings Will Continue Until Morale Improves

It’s essentially illegal to short a stock in China today.

This developed in response to the more than 40  percent drop in market value  of most stocks– as in the chart for Shenzhen Index B shown below.

shenzhen

B shares (Chinese: B股, officially Domestically Listed Foreign Investment Shares) on the Shanghai and Shenzhen stock exchanges refers to those that are traded in foreign currencies. Shares that are traded on the two mainland Chinese stock exchanges in Renminbi, the currency in mainland China, are called A shares.

China Seen Delaying Shenzhen Stock Link Until 2016 Amid Turmoil

Chinese authorities have gone to extreme lengths to prop up the stock market as both the Shanghai Composite Index and the Shenzhen Composite Index lost more than 40 percent from their June highs. They’ve banned major shareholders from selling stakes, armed a state-run margin trader with billions of dollars to buy equities, allowed hundreds of companies to halt their shares and placed curbs on bearish bets in the futures market.

One casualty has been the World’s Biggest Stock-Index Futures Market

Volumes in the country’s CSI 300 Index and CSI 500 Index futures sank to record lows on Wednesday after falling 99 percent from their June highs. Ranked by the World Federation of Exchanges as the most active market for index futures as recently as July, liquidity in China has dried up as authorities raised margin requirements, tightened position limits and started a police probe into bearish wagers.

China’s Response to Stock Plunge Rattles Traders

A business journalist has been detained and shown apologizing on national television for writing an article that could have hurt the market.

Caijin

Apparently, the beatings will continue until morale improves.

The spectacle of Wang Xiaolu, reporter at a Chinese business publication, enacting Monday what authorities called a confession of spreading “panic and disorder” in the stock market through his reporting should scare investors.

The announcement Sunday by China’s Ministry of Public Security that 197 people had been punished for spreading rumors about stocks and other issues should scare investors.

That the head of hedge fund manager Man Group Plc’s China unit has been taken into custody, as reported by Bloomberg on Monday, should scare global investors.

This is not to say that China isn’t capable of browbeating and arm-twisting and public money spending its way to a higher stock market. China asked brokerages to increase their support of a market rescue fund by 100 billion yuan last week, according to reports, a move perhaps tied to a desire for a rally, or at least stability, ahead of Thursday’s parade commemorating victory over Japan…….

They do know that a huge country is scared so badly of something that they will not, cannot, allow things to be said that cause stocks to fall.

Reflections

These strong-arm tactics go beyond anything seen in the West, in terms of damage control. Transparency,  an key feature in financial analysis, has been thrown out the window. With Goons going around bullying people to hold stocks that have lost 40 percent of their value, pressing journalists to keep quiet about problems in the market, it is a strange world in Chinese finance and stocks. People “disappear” – no record of arrest being announced.

There is no question but that Chinese macroeconomic statistics must also be viewed in a more skeptical light.

This makes assessment of the Chinese slowdown more difficult.

energy forecasting, forecasting turning points, futures markets

Do Oil and Gas Futures Forecast Oil and Gas Spot Prices?

I’m looking at evidence that oil and gas futures are useful in forecasting future prices. This is an important for reasons ranging from investment guidance to policy analysis (assessing the role of speculators in influencing current market prices).

So – what are futures contracts, where are they traded, and where do you find out about them?

A futures contract (long position) is an agreement to buy an amount of a commodity (oil or gas) at a specified price at the expiration of the contract. The seller (the party with a short position) agrees to sell the underlying commodity to the buyer at expiration at the fixed sales price. Futures contracts can be traded many times prior to the expiration date.

At the expiration of the contract, if the price of the contract is below the market or spot price at that time, the buyer makes money. Futures contracts also can be used to lock in prices, and hedge risk.

The New York Mercantile Exchange (NYMEX) maintains futures markets for oil and gas. Natural gas futures are based on delivery at the Henry Hub, Louisiana, a major crossroads for natural gas pipelines.

So there are futures contracts for 1 month, 2 month, and so forth, delivery dates.

Evidence Futures Predict Spot Prices

As noted by Menzie Chinn, a popular idea is that the futures price is the optimal forecast of the spot price is an implication of the efficient market hypothesis.

Nevertheless, the evidence for futures prices being unbiased estimators of future spot prices is mixed, despite widespread acceptance of the idea in central banks and the International Monetary Fund (IMF).

A recent benchmark study, Forecasting the Price of Oil, finds –

some evidence that the price of oil futures has additional predictive content compared with the current spot price at the 12-month horizon; the magnitude of the reduction in mean-squared prediction error (MSPE) is modest even at the 12-month horizon, however, and there are indications that this result is sensitive to fairly small changes in the sample period and in the forecast horizon. There is no evidence of significant forecast accuracy gains at shorter horizons, and at the long horizons of interest to policymakers, oil futures prices are clearly inferior to the no-change forecast.

Here, the “no-change forecast” can be understood and is sometimes also referred to as a “random walk forecast.”

Both Chinn and the Forecasting the Price of Oil chapter in the Handbook of Forecasting are good places for readers to check the extensive literature on this topic.

Hands-On Calculation

Forecasting is about computation and calculation, working with real data.

So I downloaded the Contract1 daily futures prices from the US EIA, a source which also provides the Henry Hub spot prices.

Natural gas contracts, for example, expire three business days prior to the first calendar day of the delivery month. Thus, the delivery month for Contract 1 in the US EIA tables is the calendar month following the trade date.

Here is a chart from the spreadsheet I developed.

FuturesDirectionCallChart1

I compared the daily spot prices and 1 month futures contract prices by date to see how often the futures prices correctly indicate the direction of change of the spot price at the settlement or delivery date, three days prior to the first calendar day of the delivery month. So, the April 14, 2014 spot price was $4.64 and the Contract1 futures closing price for that day was $4.56, indicating that the spot price in late May would be lower than the current spot price. In fact, the May 27th spot price was $4.56. So, in this case, not only was the predicted direction of change correct, but also the point estimate of the future spot price.

The chart above averages the performance of these daily forecasts of the future direction of spot prices over rolling 20 trading day windows.

From January through the end of September 2014, these averages score better than 50:50 about 71 percent of the time.

I have not calculated how accurate these one month natural gas futures are per se, but my guess is that the accuracies would be close.

However, clearly, a “no-change forecast” is incapable of indicating the future direction of changes in the gas spot price.

So the above chart and the associated information structure are potentially useful regardless of the point forecast accuracy. My explorations suggest additional information about direction and, possibly, even turning points in price, can be extracted from longer range gas futures contracts.