Markets and Economic Indicators
Perhaps the main factor that sways market pricing of stocks and commodities is the movement of the economy, and a bulk of traders read economic indicators as a fundamental part of their trading strategy. The markets respond to economic indicators so readily because they impact on almost every sector, and have a knock-on effect on the success or otherwise of publicly traded companies. Coupled with current affairs, nothing moves the markets quite like economic announcements, and with a comprehensive and clear calendar of what’s getting announced when, you can start to develop a more targeted trading strategy to determine better investments more consistently.
Economic indicators that are perceived to be positive could buoy a particular share price or hinder it, depending on the interrelation of the underlying business to that economic sector, and the same is true in reverse of perceived negative announcements and economic decisions.
For example, an increase in interest rates in the US could be seen as a positive move for an aircraft manufacturer with heavy US trade, and cause share prices to rises as a consequence. This is because a rise in interest rates will strengthen the dollar, making it more attractive for US businesses to spend abroad and import goods, which could have a direct positive impact on the bottom line of the UK manufacturer.
At the same time, the exact same announcement could be seen as a negative for US home builders, who may struggle to sell off housing stock if interest rates have risen, as a result of the increased costs of borrowing which will price some consumers out of the market. Depending on a host of other factors, this in isolation could result in a fall in price of the home-builders’ stocks, and might be a sign for traders to short stocks across the industry.
To add further complexity, the difference between perception and reality with economic announcements can also effect price movements, even where the spirit of a particular announcement would tend to suggest a particular price movement. For example, if US interest rates were expected to rise by 1.5% but actually rose by 0.5%, this could send traders off towards shorting the stocks of the aircraft manufacturer because the news wasn’t as good as expected for that particular business, even though the overall spirit of the announcement still weighed in the manufacturer’s favour.
Obviously markets respond to economic announcements and indicators of economic well-being, but were it such a straightforward process investing would be an easy game. The trick with reading external factors and applying them to the markets is to have a full, 360-degree picture of how savvy traders are likely to respond, and trying to anticipate the relevance and effect of scheduled announcements before and just after they are made.
While it’s still more than possible to get it wildly wrong with this kind of strategy, trading on the news nevertheless provides for more consistent trading, particularly as you come to experience exactly how the markets respond to particular announcements.