In the financial markets, price movements play a very important role. An uptrend move represents an opportunity for the bulls while a downward trend represents an opportunity for the bears. These price movements are caused by a number of factors. In the stock market, the intrinsic value of the company will determine a buy or sell opportunity. Investors will prefer buying companies that have a fair market valuation depending on their intrinsic value. In addition, investors always look at the macroeconomic environment. In a favourable market environment, a bull run will be experienced. In this article, I will highlight the leading macroeconomic noisemakers in the financial market today.
In the financial market, the interest rate is one of the most important factor. This is because it determines the borrowing capabilities of people and corporations. In a market of low interest rates, the level of borrowing will be high. As a result, people and companies will spend more using debt. This will fuel inflation where prices of basic commodities will rise which will have an impact to all. Therefore, to curb this situation, the Federal Reserve or the central bank will raise interest rates to reduce inflation. In America, the Federal Open Market Commission, led by Janet Yellen is tasked with coming up with the interest rates.
This year, most of the volatility in the financial market has been caused by the interest rate issue. Many analysts and strategists believe that the fed will raise interest rates this year. Some analysts estimated this to be done during the June meeting. Others believe that it will be done in September while others have placed their bets on December.
In a recent Janet Yellen presentation, she made it clear that the decision will be determined by the data. Of late, data on key economic indicators have been very positive. The employment rate, payrolls, inflation, and business behaviour have been positive meaning the fed will likely tighten this year. However, while most analysts believe that tightening will happen this year, the situation has been complicated by the IMF’s Christine Largade who believes that this will have a negative impact on global economy.
As a result of these issues, the level of volatility has increased because no one knows when and what will happen.
Uncertainties In The Eurozone
The Eurozone is another cause of volatility in the financial market. This is especially on the situation at Greece which could default on its loan to the International Monetary Fund and the European Union. In June, Greece was expected to pay £305 million to the IMF but it differed the funds to 30th June when it is expected to pay £1 billion. At present, the country is negotiating with the Eurogroup to get funding to pay the debt. However, talks have not resulted to anything meaningful with many people expecting the country to default.
A default could have serious consequences in the Eurozone with spill-over happening globally. A deal between Greece and the European creditors could impact the Euro positively while a default will lead to a dive in the currency among all the major pairs.
On Friday, Russia announced that it was considering providing aid to the highly indebted country for the sake of trade and stability. Aid from Russia will strengthen the two countries and probably lead to a Grexit (a term signifying Greece exit from Eurozone). Russia, which is slowly being alienated because of the Ukraine crisis needs many friends to boost its trade.
Another uncertainty in the Eurozone is on the future of the Eurozone after many countries have expressed interests in exiting the block. When David Cameron was elected, he promised to carry out a referendum to determine whether UK will stay in the block or not. Other countries such as Spain and Italy which have high debts might consider exiting too. Therefore, this will lead to more volatility in the market.
Slow Growth In China
In the recent times, the Chinese economy has grown significantly with many estimating that the economy will pass the United States in the near future. However, signs are clear that the country might be facing a recession following the release of weak data. On Friday, the Chinese bourse lost more than 10% signifying the start of the Chinese selloff.
A Chinese selloff could have significant consequences in the financial market. In fact, it has chances of causing spill over effects to the global financial market owing to its position as the leader of the emerging markets.
In 2014, a crisis started by Russia started in Ukraine. Russia started its annexation of Crimea which has affected most of the Eastern part of Ukraine. This has led to straining of the relations between Russia and its former friends. The United States has placed multiple sanctions on the country. War is continuing in the Eastern part of Ukraine. The effect of this to the financial market deals with Russia and how it can replace its long friends. The end of the hostilities between Russia and the G10 will lead to a recovery.
There are other macroeconomic factors such as the global oil prices and the deflation in Japan. These noisemakers are leading the volatility in the financial market. As a trader you must be aware of them and allocate resources cautiously. For instance, tightening by the Federal Reserve can lead to a sudden rise in the dollar against the main currency pairs. This could have an immediate effect to the financial market with many people making huge losses.