What Factors Impact the Financial Markets?

Part 6 What Factors Impact the Financial Markets?
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There are many factors that can cause the markets to move and you should keep on top of them if you want to be a successful trader. The last thing you want to do is enter a trade and have the market move against you for reasons you have no clue about!

What Moves The Financial Markets?

  • Macroeconomic Factors
  • Central Bank Policies
  • Government Intervention, Politics and Regulations
  • Company Announcements, Earnings Season and Dividends
  • Market Psychology
  • Unexpected Events and Algo’s

Regardless of what business you are in – there will be factors unique to that business that can impact it, and if you want to be successful you will need to understand what these factors are. The same is true for the financial markets.

However, before we look at these factors we must understand two key elements.

  • How news moves markets
  • Market uniqueness

Table of Contents

Trading the News

Trading, whether you are using technical or fundamental analysis, is about looking at past performance or events and then trying to predict the future in order to make a profit.

Trading is about looking at past performance or events and then trying to predict the future in order to make a profit.

There are two ways that you can view all these factors, firstly as information on what is already known and secondly as information on what is predicted to happen.

Markets look forwards, not backwards

Some people might say that market prices reflect only what is already known but in reality the markets are a prediction machine, they actually reflect an expectation of future outcomes.

This makes sense logically as most traders and investors, including you if you are a trader or investor, are looking for future rewards.

The way that we test our predictions is by placing trades in the market. If the future is in line with our predictions, we hope to make a profit. If not, we will be punished with a loss.

How News Actually Moves The Markets:

As such, what moves markets, is not the news as it happens for each of these factors but how much the news differs from expectations. What this means is that often news is already priced in (it is expected) before it happens.

Initial reaction vs long term outcome:

It is also important to note that after any news release, there is an initial reaction that may not reflect the eventual trend.

It may take some time for the news to be fully evaluated by the market before this can confirm the market’s direction. Make sure to check out the description for links to some useful sources of free information and news announcements.

After any news release, there is an initial reaction. But it takes some time for this to be fully evaluated by the market before this can confirm the market's direction.

What is high, medium and low impact news?

This is really self-explanatory, but remember that even if a website says a particular news event is high impact, you will only know the truth of that once you have

  • Studied your market well and
  • Backtested that news event against your strategy over a period of time.

Each market is unique

It is important to know that each financial market or instrument is unique in some way. The Dow will move on different factors to the FTSE and both have different factors to Gold or Oil markets.

Each financial market or instrument is unique. The Dow will move on different factors to the FTSE and both have different factors to Gold or Oil markets.

It not just about correlation

That is not to say that markets cannot be correlated. Markets can have many correlations. A correlation between markets exists where they share some common fundamentals that drive that market.

Even if markets are correlated they may have different price action depending on that market’s volume, volatility, trading times etc.

It is well worth becoming an expert on any market you want to trade on a regular basis so that you can understand its unique properties and give yourself more of an edge when it comes to making a trade.

Not only will each market have different fundamentals, but they will also have different price action depending on that market's volume, volatility, trading times etc.

Macroeconomic Factors

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on aggregate changes in the economy or the performance of whole sectors or elements of the economy.

Key macroeconomic factors include:

  • Labour markets (unemployment and productivity)
  • Gross Domestic Product (GDP)
  • Inflation
  • Demographic trends
  • House prices
  • Bond yields
  • Retail sales
  • Production and manufacturing
  • Commodity prices

The Top Down Approach

Generally, macroeconomic factors are looked at to give a high level (top down) view of an economy and the impact on the markets. These are the types of factors that drive long term trends.

When macro news suggests growth of the economy or a sector then this is bullish for many markets. News that can suggest economic contraction is bearish for most markets.

Defensive Sectors

However, bad news is not bad for everyone. Some sectors or companies are viewed as defensive. These are seen as being more resilient to recessions and money can move into them when data is poor.

For example, an ageing population and low birth rates is negative for economic growth but could be very good for the Healthcare sector.

For more information on defensive sectors, have a look at this article from thebalance.com.

How To Trade Macroeconomic News

As a retail trader, the details of what all this means is often less important than the knowledge that they will move the markets at the time of the announcement.

From a technical viewpoint, this may mean sitting out completely until you can see whether that news created a new trend or the market reverts back to the previous trend.

The ironic thing about macro news is that despite the fact that macro is by definition long term, many traders get burnt by trading it in the short term, especially around news events.

A good article on macroeconomic trading strategies can be found here from ig.com: What are the key macroeconomic indicators to watch.

Central Banks

One of the most influential players in the financial markets are the Central Banks. Some of the biggest macro events are central bank announcements and policies.

The Goals Of Central Bank Policy

Central banks around the world have mandates for their respective governments. A mandate is basically another way of saying their goals (what they are looking to achieve through their policy). These goals differ from country to country but mainly focus on:

  • Internal price stability and maintaining inflation
  • Currency stability (volatility and strength)
  • Stability and confidence of the financial system
  • Maintaining or targeting low unemployment
  • Economic growth

For a list of the central bank mandates, have a look at this article from Investopedia.

To achieve their mandates, central banks have a range of monetary policy levers. The most well known and most often traded are interest rate announcements.

There are many different interest rates in an economy – I am sure you are all aware that you don’t pay the headline interest rate that you see on the news on any loan or credit card you may have (you will pay a lot more)!

However, the rate set by the Central Banks is seen as the base rate for an economy – this is the rate at which banks can lend from the central bank. This then affects:

  • The rate that banks charge each other (interbank rates)
  • The rate that banks charge their customers
  • Savings, lending, mortgage rates, credit cards and so on

Why Do Interest Rates Change?

In general, interest rates are cut to encourage lending and boost an economy and are raised to slow down an economy and reduce inflation.

Central Bank Influence On Markets

In recent years, the central banks have become increasingly large players in the market due to the amount of money creation after the 2008 financial crisis. They have great influence over more than just interest rates, they also have a range of powers to affect money supply in an economy.

As such it is important to note that markets watch the large central banks announcements very closely. Due to their increasing importance there are more and more news events related to the central banks that can move the markets, including talks by prominent members of these central banks.

The most influential central bank is the US Federal Reserve (The Fed), followed by the European Central Bank (ECB). Click on the image below to download a copy of our free PDF of the world’s most influential Central Banks.

In the description I have added links to sites where you can keep a track of the members. Also , you can click the link: https://www.itcmarkets.com/hawk-dove-cheat-sheet-2/

Government Intervention, Politics and Regulation

Why are governments important for markets? Well, because governments ultimately set the rules for a wide range of policy and regulation that affects all the markets within its jurisdiction.

The key elements of government policy that can affect markets are:

  • Regulations, these can either open up or restrict access to market markets
  • Creation and regulation of the markets themselves, including the stock markets
  • Trade agreements and tariffs
  • Tax, both corporate and personal
  • Central bank mandates
  • Labour market policies (wage rates and costs of employment)
  • Infrastructure. This can include transport infrastructure but also other infrastructure that facilitates business
  • Political stability
  • Exchange rate policy

Politics Matters

Political events and decisions can be significant. The creation of the EU and Brexit were both political decisions and both had (and will have) major impact on the markets for decades to come.

Politicians want to be popular and be re-elected and they will, through their governments, react to macro-economic announcements such as unemployment figures with policies that have knock-on effects across markets. This also applies to politicians looking to get into office as well as those that are already there!

Political events and decisions can be significant - e.g. BREXIT.

Fiscal Policy

Aside from policy changes a government’s biggest lever is their fiscal policy – the amount of money they decide to spend. And you can only spend money that you get from tax or from borrowing. So government borrowing and tax plans are closely watched.

A government's biggest lever is fiscal policy - the amount of money they spend.

Company Announcements, Earnings and Dividends

Next up, and quite important if you are trading stocks or stock indexes are company announcements.

Companies listed on stock markets are required by law in most countries to make public announcements of any information that may have an impact on its share price or performance. 

As such if you are trading a particular company you should subscribe to announcements for that stock.

Indexes

A stock index is a composite of multiple companies that is traded on the markets. Well known indexes are the S&P 500, Dow, Nasdaq or FTSE.

If you are trading an index then you should know the constituents of that index or at least the most influential companies in that index.

If you do not know which companies are in an index you trade or how big a part they play in the index, then you can be left in the dark when a major announcement moves that market.

If you are trading an index, then you should know which companies comprise that index and how big a part they play in the index.

Types of market announcements

There are two major types of announcements that companies will make regularly – earnings and dividends. These announcements let the markets know how they performed against expectation (earnings) and what proportion of earnings will be paid to investors as dividends. These dates are well publicized for the biggest companies.

There are two major types of announcements that companies will make regularly: Earnings and Dividends.

Market Psychology/Sentiment

This one is harder to define than the others. Market sentiment is the general feeling of investors and traders in a market. This is usually defined as being Bullish when prices are going up and Bearish when prices are going down.

Market sentiment is not so much about the prevailing trend (Bullish or Bearish) but the general confidence that the current trend will continue. Market sentiment can be a self-fulfilling prophecy – when the majority of people are confident the market will continue to rise then they will invest, pushing prices up and increasing the sentiment.

For this reason, the market sentiment can often be at odds with the fundamentals but can change surprisingly quickly. The effects of this group psychology can be dramatic. The most extreme examples of this are the creation Market Bubbles such as the .com bubble 1994-2000 or Bitcoin bubble of 2017-2018.

Unexpected Events and Algo’s

The one thing that can always be expected is the unexpected. You never know when a news event (or Presidential tweet) will emerge that moves the market.

Always expect the unexpected. You never know when a news event will emerge that moves the market.

Unexpected events could be short term like extreme weather events or geo-politcal events, conflicts or threats of war.

No one can accurately predict the exact movement of any market, but all of you can predict one thing with 100% accuracy – and that is that at some point some unexpected event will happen that moves a market you are in.

This is why it is so vital to have good trade and risk management rules. It will help you manage your risk when the unexpected happens.

It is vital to have good trade and risk management rules.

To learn more about risk management and trading plans be sure to read the last two units in the Trading Basics series:

Algo’s

Now, you may have noticed that I don’t give any specific advice about how any of these factors affect a particular market.

The first reason for this is that there are so many markets that can be affected in many different ways. What this means is that no-one can give hard and fast rules that will tell you what will happen in certain circumstances.

However ‘rules’ like interest rate cut = drop in currency value are very common. You must be very careful with these because on the whole most of these “rules” are:

  • Not that useful (or complete rubbish)
  • Can actually be risky for the inexperienced retail trader that does not fully appreciate that it is not the news that moves a market but the news in relation to expectations

Secondly and more importantly is the effect of Algo’s.

What are Algo’s?

Algo’s are automated trading programs that many big players in the market use to trade news events. These Algo’s work off live news feeds and can receive new data, compare against expectations and make a trade faster than any human being can even make a single mouse click.

Algo's are automated trading programs that many big players in the market use to trade news events.

If you are sitting in front of a screen waiting to trade a news announcement the only thing you are doing is trying to be quicker than other humans that have already lost to the Algo’s!

Algo’s can create fake volatility

Another effect of Algo’s is that they can cause big spikes in volatility during news events. For retail traders trading with leverage, these spikes can easily wipe out your margin or stop loss.

Algo's can cause big spikes in volatility during news events and these spikes can easily wipe out your margin or stop loss!

Resources

That concludes this unit which is all about data and knowing when it happens. Finding good sources of data was one of the biggest challenges for me when starting out so be sure to check out the links below which for loads of information and data you will need if trading the markets.

The next unit in the trading basics series is an Introduction to Fundamental Analysis.

Central Banks:

Economic Calendars, News and Info:

MT4 News Indicator:

Free MT4 news indicator: The FX News on Chart MT4 indicator displays upcoming news events directly on the chart. This can be shown as a list of news events and times, as vertical lines on the chart or both.

You can download it for free here: FX News On Chart Indicator.

More Trading Basics

There is loads more to learn and we will uncover more terms in the rest of the Trading Basics blog series. Read our previous or next unit.

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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