Weekend wait fails to stop futures sell-off

FRIDAY'S sell-off in Hang Seng Index futures continued yesterday, with 45 points coming off the December contract to 9,820.

January futures fell 35 points to 9,890. Both contracts slumped more than 100 points last Friday.

The December contract lost ground in early trading, falling from an opening of 9,890 to 9,800 before 10.30 am.

The low of the day was near the lunch close at 9,792. The high was the opening.

In all, there were 18,311 contracts traded in activity boosted by roll-overs from December to January. There were 13,823 contracts traded in December and 4,488 dealt in January.

Open interest for Friday saw 33,372 contracts in December and 6,968 in January. In March 1996 there were 172 contracts and in June there were 745.

Index options saw 2,522 lots traded.

Jardine Fleming said: 'Bearish sentiment also spread over the options market on the back of a weak futures market.' Bearish investors from overseas bought December 9,400 and 9,600 puts. Premium sellers sold December 9,800 calls.

'January implied volatility fell to 15 per cent after the rally last week,' the brokerage said.

The 100-day Hang Seng Index volatility index stood at about 13.5 per cent. These volatility readings mean investors trading in recent days do not believe there is going to be massive volatility ahead, as reflected in option prices. A flat period ahead is expected. The low volatility reflects investor hedging activity against positions in futures and the cash.

A quiet day is expected today ahead of the meeting of the United States Federal Open Market Committee overnight.

Bond and equity markets around the world have discounted a cut of about 25 basis points in interest rates.

With little to go on, there could be further losses in moderate trading today, taking the cash market below 9,800 and with the December futures contract testing 9,800.

Should a rate cut fail to emerge the big premium between the cash, the December contract and the January contract is expected to collapse. It is hoped a rate cut will pump-prime a Chinese New Year rally into being.