Futures: What they really tell us about the markets (and what they don't)

Often presented as "leading indicators," futures have become a staple of morning market commentary. However, interpreting them requires a more nuanced approach: these financial contracts do not predict the future; they reflect the state of the market at a specific point in time.

A future, or futures contract, is a standardized agreement to buy or sell an asset at a future date at a price fixed today. These instruments are traded on organized exchanges, such as Eurex in Europe or the CME in the US, and are secured by a clearing house that guarantees the trades.

Every day, positions are adjusted based on price fluctuations. This mechanism makes futures highly liquid products, used for both hedging and speculation. A future is not a forecast in the strict sense, even if it incorporates expectations. It is a market price, determined continuously by supply and demand.

Prices driven by technical factors

The price of a futures contract does not solely reflect investor expectations. It primarily depends on the "cost of carry." In its simplest form, this mechanism incorporates the current price of the asset, interest rates and specific variables: storage costs for commodities, or expected dividends for equity indices, which then reduce the contract price.

Depending on the balance between these elements, the future may trade above or below the spot market, situations referred to as "contango" or "backwardation."

A market that almost never sleeps

One of the specificities of futures is their near-continuous trading. In Europe, DAX and Euro Stoxx 50 futures, traded on EUREX, begin trading as early as 1am. In the United States, they resume on Sunday evening and operate almost 24 hours a day. They thus integrate information from Asia, economic announcements, and investor reactions, even while equity markets are closed.

This explains their central role in pre-market commentary: they provide an indication of market trends overnight.

European pre-opening vs. US futures: avoiding confusion

From 8am, European equity markets enter the pre-opening phase. Orders accumulate and a theoretical price is formed, but transactions do not begin until 9am.

During this interval, two signals coexist: pre-opening indications from European exchanges and US index futures, which continue to trade. Investors use the latter to calibrate their orders on local markets, although these are two distinct mechanisms that are often confused.

Trading hours vary by exchange:

- EUREX (Frankfurt): DAX futures (FDAX) and Euro Stoxx 50 futures (FESX) trade from 1am to 10pm CET in three phases: the Asian session (1am-8am, with reduced liquidity), the European session (8am-5:30pm), and the American session (5:30pm-10pm). German sovereign bond futures follow the same schedule.

- Euronext Paris: CAC 40 futures (FCE) trade from 8am to 10pm CET, without an Asian session. Its hours are aligned with the European trading day.

- ICE Futures Europe (London): FTSE 100 futures offer extended hours comparable to those of EUREX.

- In the United States (CME): Equity index futures trade from Sunday 11pm (Paris time) to Friday 10pm, with a daily break between 11pm and 12am. Commodity futures (WTI crude oil, gold) follow a similar schedule, while interest rate futures are active from Sunday 11pm to Friday 10pm. US index futures thus trade almost continuously, which is why "Wall Street futures" can be monitored at any hour.

What is their utility for institutions?

Initially, these financial products were created as hedging instruments for large institutions. The arrival of speculators in these markets subsequently provided the liquidity necessary for large transactions.

However, hedging costs on futures contracts should be monitored, as they can rise quickly. With a value of €10 per point for both the CAC 40 and the Dow Jones, financial exposure increases rapidly. While movements on the French index remain relatively contained, the US index is characterized by marked volatility, capable of amplifying gains but also losses in a spectacular manner.

The margin call mechanism is fundamental: at the end of each losing session, the investor must cover latent losses with the clearing house. Unlike traditional equity investment, where risk is capped at the amount invested, futures contracts present a much higher risk profile, potentially leading to losses that significantly exceed the initial capital.

For corporations, the primary use is to mitigate risks associated with price volatility. A company would prefer to fix the cost of its supplies, such as fuel, via futures contracts to anticipate its expenses, rather than letting market fluctuations dictate its profitability.

Real-time tracking, hence volatile

Futures provide an indication of market sentiment at a given moment. But their morning levels do not constitute a reliable forecast of the opening, particularly for Wall Street. Between 8am in Paris and 3:30pm in New York, many factors can shift the trend: macroeconomic releases, corporate earnings, or geopolitics, for instance.

Their main value therefore lies elsewhere: providing a continuous reading of the markets when equities are not trading.