The sentiment of the market is significant in finding the market direction for the coming week or the next day. Fundamental forces also have a significant influence on prices. These fundamental forces are often behind the scenes but remain a very important tool to monitor and understand. The goal of this article is to provide binary traders with a basic understanding of fundamental tools. It's worth noting that the relationship between the market and fundamental forces is not linear. This means today's price patterns cannot directly predict what's going to transpire in the next week or tomorrow. Rather, price action can be compared to a chemical reaction. For example, whenever an acid is fused with a base, the reaction is non-linear, which is the same as the market.
The globalisation of the world economy creates a spillover effect among different economies, in which a change in employment, inflation, interest rates, or housing prices in one country can impact the global economy in a big way. The catalyst of this phenomenon is the internet. Whenever there is a trigger event, there will undoubtedly be a reaction. The magnitude of the reaction will depend on the level of surprise. Therefore, expectations can be considered a fundamental tool, since there's so much interconnectivity between the economies of the world. It can invoke fear to know fundamental forces. Fortunately, this article is constructed in a way that filters the noise from the key fundamental tools that will impact the market in a big way.
I will first explain the impact of the Chinese economy on the global markets. It should be obvious that the expectations of China's growth rate will have a larger impact on the global economy. The growing importance of the Chinese economy became more evident when the international monetary fund granted the Chinese yuan reserve status in 2015. There are many reasons for traders to constantly monitor economic news from China. Firstly, China is a global production hub. This means it imports raw materials from around the world and exports consumer products to the rest of the world. Markets around the world won't be impacted in the same way by the growth prospects of China. For example, China is a major trading partner with Australia, and therefore the Australian dollar will be more impacted by China's economic news than the Euro.
When the market opens on Monday, the performance of the Shanghai index gives traders a clue on which markets should be traded for the week. For example, when the yuan was devalued on the 11th of August 2015, the growth of the Chinese economy increased. As a result, there was greater demand for Australian exports, and the Australian dollar gained upside momentum. When traders are assessing global market conditions, they will realise that an overarching theme is a global slowdown and global growth. When investors across the globe are expecting growth, this will cause inflation, consumers will have to pay more for products and services, the commodity prices will increase, and there will be hiking in interest rates. As Time goes on, higher interest rates will start to slow down growth to decrease inflationary pressures.
In contrast, when there is the expectation of lower growth, interest rates will be lowered, demand for crude and commodities will trade at lower prices and there will be a sell-off in the stock market. In this instance, the fight will be against deflation rather than inflation. Commodity markets are one of the fundamental forces that will move the market in a big way. The rising or falling of commodity markets should be used to shape and select trades, depending on the magnitude of the price movement. A spike or drop in commodities will spill over to the stock market. Therefore, traders who are looking to trade the oil market need to have a firm understanding of the pattern and trend in place, especially options traders. A substantial decrease in the price of oil can be a precondition for shorting the market.
Those who trade options will be required to have good timing on the expiration. However, there's a high chance crude won't bounce back after a surge down. It will take cuts in oil production or a shift in global growth to be bullish. Traders should keep a closer look at the correlations between instruments and different markets. Monitoring correlations will help traders with risk reduction. For example, if the trader is trading different markets which are highly correlated, the risk Will be higher. When the markets are risk-averse, there tends to be an inflow of capital into gold. Traders need to understand that sometimes gold will perform poorly in crisis events, due to the requirement to raise capital. Therefore, traders need to be careful when buying gold in a crisis, because the demand can only be temporary. From a fundamental Force perspective, gold is used to hedge against inflation.
There will be demand for gold when there's a major financial crisis or fears of inflation. Whenever interest rates are increasing, money will flow to where it will yield greater returns. This is the reason why gold will go up whenever there's a bad job report that is a surprise to the market. Traders can track and monitor the performance of the US dollar by looking at the dollar index. There have been arguments that the dollar index is not representative of global trade interactions. Therefore, economists and the Fed use the trade-weighted dollar index, which is more appropriate for evaluating the strength of the dollar. The US dollar and gold have a negative correlation, meaning when the dollar appreciates, gold will depreciate. The most dominant Force relating to the U.S. dollar is fear of deflation of fear of inflation.
It's a very complicated relationship, especially due to the low rates post-2008. The central banks were stimulating the economy with quantitative easing, and when it came to an end in 2014. As a result, the market expected interest rates to go up and that was dollar bullish. In some cases, there will be fear of the government not being able to control spending, and this will make the dollar an attractive investment. When investors are bullish on the dollar, they are usually short the equity markets.