KEY POINTS:
US stock-index futures are becoming less reliable as predictors of market moves.
With equity investors around the world contending with the worst drop since the Great Depression, futures on the Standard & Poor's 500 Index understated gains or losses by an average 1.4 percentage points in October, twice
the gap in the third quarter, data compiled by Bloomberg show.
One of the biggest misses was onOctober 24, when futures fell as much as 60 points, while the index itself dropped 37 points in the first half hour of trading, before closing down 31.
The pre-market readings might be adding to volatility during a month poised to be the worst in the 38-year history of MSCI Inc's index for developed countries, investors said. While fundamental concerns about the health of the global economy and solvency of banks weighed on investors, the false cues were adding to uncertainty, said Arthur Cashin, director of floor operations for UBS Financial Services at the New York Stock Exchange.
"It's a state of permanent anxiety, because you don't know where things are going to go," said Cashin, a member of the NYSE for 44 years.
The MSCI World index lost more than a quarter of its value this month as subprime-related credit losses topped US$680 billion ($1.2 trillion) and global economic growth slowed.
The S&P 500's 40 per cent loss in 2008 would be the biggest since 1931.
With trading in US stock-index futures running more than 23 hours a day on weekdays, their movement can affect sentiment around the world.
Trading in Europe's Dow Jones Stoxx 600 Index 15 minutes before the US market opens has also been a poor indicator for how equities on the Continent will end the day.
In July, August and September, its move at that hour differed from the index's close by less than 1 percentage point, according to data compiled by Bloomberg. The gap grew to 2.2 percentage points this month.
While futures may be becoming a worse predictor amid unprecedented actions by central banks to bail out the financial system, pre-market trading is only an indication of what might happen, according to John Carey, a Boston fund manager at Pioneer Investment Management. "They're just people's best idea on the market at a time when there are no actual trades," he said.
This month's biggest swing in S&P 500 futures was on October 8, when a decline of 3.7 per cent in the December contract became a 1.4 per cent gain in the benchmark index by 10am after six central banks announced co-ordinated interest-rate cuts.
"It's a 24-hour watch," said Walter "Bucky" Hellwig, who helps oversee US$30 billion at Morgan Asset Management in Birmingham, Alabama. "I check the futures when I go to bed. I check them when I get up and sometimes I even get up and check them in the middle of the night."
- BLOOMBERG