How They Passed The Test

September 17, 2001
Marc Dupee

Open outcry trading
in the US futures markets re-opened for the first time since the 9/11 attack and successfully passed the test. But it wasn’t easy.

Traders had to be literally shipped by ferry to
the New York Mercantile Exchange (NYMEX) near the site of the disaster to
swap energy and metals contracts. And trading at the New York Board of Trade
had to be moved to the exchange’s alternate site in Long Island City with
staggered openings of cocoa, coffee, sugar, cotton and orange juice which
lasted only 90 minutes each.

As many expected, stock index futures cascaded
despite the Federal Reserve slashing interest rates by .50% between FOMC
sessions for the third time this year. Today’s move marks the Fed’s eighth
rate cut of 2001, and leaves the fed funds target rate at 3.00%.

The

December Nasdaq 100 futures
(
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to expanded (-5%), limit-down level. But both encountered resistance at the
38.2% and 50% levels, respectively, of their morning’s declines and
continued falling as traders found those levels a good place to get short
again.

The markets reacted as many have predicted in the
aftermath of the worst terrorist attack ever with stock index futures
selling off and traders fleeing into perceived “safe havens” such
as gold and non-dollar-denominated asset classes.

While the Fed’s .50% rate cut seemed to have only a
limited effect on equities and index futures, the bond market had already
priced in a Fed rate cut and sold off from highs, in part because such low
interest rates will likely generate inflation during the life of longer-dated 10-year and 30-year Treasuries. Two-year notes and December fed funds
futures
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rate cut by Christmas, while T-bonds
(
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105 13/32 and
10-year notes
(
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The European Central Bank (ECB) also showed unity in
a coordinated move to provide the global economy with liquidity by slashing
rates 50 basis points. This brought the dollar back from the five-month low
that it was trading at when the ECB announced the cut mid-morning. But euro FX futures

(
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Swiss francs
(
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close up .0046 and .0073, respectively, leaving bullish tails near highs, constructive
setups for contracts on the Momentum-5
List. Interest rates in Switzerland remain slightly higher than Europe or
the US and the “neutral” nation’s currency and banking system has
long been considered a safe haven in times of uncertainty. The Swiss franc
is the #2 contract on the Momentum-5
List.

December gold
(
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levels after it gapped open, but gave some indication that it could come
down due to the small spread between the cash and December contracts prior
to the open. Both were priced nearly the same at the 11:45 AM ET opening. In
this instance you expect the futures to drop — or the cash to rise vs.
the futures — to account for the “carrying cost” of gold
(security, storage, interest, etc.) required from now until December.

In abbreviated trading where each contract was open
for 90 minutes — one after the other — softs contracts, trading at the New
York Board of Trade’s alternate trading site in Long Island City also opened
for their first time in nearly a week. Dec. cocoa
(
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but sold off from its highest levels. British pounds were higher before the
ECB cut rates. Cocoa is predominantly priced in pounds, so an early rally in
pounds made cocoa relatively more expensive, spurring buying.

A similar effect was seen in grain pits in Chicago.
November soybeans
(
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PowerRating) rallied 6 to 480 on the prospect that
a weaker dollar could spur purchases from the number one grower, the United
States. Soybean meal
(
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PowerRating) also rallied 1.9 to 169.1 and could
continue to rally if the protein source is used to a greater extent for
animal feed in Japan, home to the latest case of mad cow disease.

How They Passed The Test

BUY THE FEAR, SELL THE GREED

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