Politics and Markets Many investors and traders believe that trading success lies simply in spending hours and hours technically analyzing charts and indicators. However, technical analysis plays a primary role in trading.
A decision by a government or the announcement of a change in the economic policy of a Central Bank can completely alter the technical evolution of a market. The operators must know it since the markets‘ reactions to this type of event usually cause excellent trading opportunities.
Investors, therefore, should bear in mind that politics can play a determining role in their decisions. The fundamental analysis of the markets must always contemplate the possibility of situations of significant volatility and drastic changes in values after actual events and political announcements.
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There are plenty of examples. To better explain them. The political events with an effect on the markets could group as follows:
Analysts tend to agree that investors do not look favorably at moments of political uncertainty. It is because these situations often increase risk in an uncontrolled way. In a case of political stability, with an environment that guarantees legal certainty for developing a business activity, stock markets tend to rise. On the contrary, political instability increases uncertainty and, therefore. The risk perceived by the market, so the usual thing in these circumstances is for stock markets to fall.
For example, the day after the general elections in Spain in December 2015, the uncertainty caused by their results caused the main Spanish stock market index, the IBEX 35, to open with a significant fall of close to 3.7% ( see the IBEX 35 in real-time ).
We experienced another recent example in Spain with the crisis caused by the rise of independence in Catalonia, one of the Spanish regions of most significant economic importance. October 1, 2017, was one of the most important dates of this crisis since it was the day held a referendum on Catalonia’s independence.
As can be seen, just after October 1, were increases in volatility that peaked on October 4 and 5, 2017, with daily variations in the price of the index by 3%. These dates are marked on the chart above with a blue circle. October 4 was the most significant fall record in the selective since the announcement of BREXIT.
These two are examples of political instability’s effect on stock markets. On the contrary, the markets react when uncertainty dissipates. And signals of a return to stability and political normalization are emitted. It is what happen. For example, after Trump’s long-awaited first speech as president in the United States Congress:
At the end of February 2017, after Trump’s first speech in the United States Congress. Wall Street received the US president’s speech in Congress positively: the Dow Jones index rose above 21,000 points for the first time in its history. The upward reaction occurred in this index, and the Nasdaq 100 and the S&P 500 achieve historical figures.
This positive reaction came after a speech that was consider by the market to be much more conciliatory than disruptive. Which was initially expect. This is a clear example of investors’ move where more excellent stability is perceive.
Until now, reactions to situations of political instability in the stock markets have been describe. However. Other markets are susceptible to these situations of uncertainty. One of them is the oil market.
The crude oil market is susceptible to political instability. Some of the most important oil-producing countries are locate in regions characterized by political instability. Such as the Middle East or parts of Africa. When political turbulence occurs in these countries, it is normal for a violent rise in oil prices.
This occurs because investors perceive that a scenario of restrict supply may occur. This restriction would cause a decrease in stores. Which would lead to an increase in the price of oil. Given this perception. The market increases the buying pressure for crude oil, raising its value.
An example of this occurred after the turbulence that originated in January 2016 and produced clashes between some significant OPEC oil-producing countries, such as Saudi Arabia and Iran. After registering a minimum of USD 27 in mid-January 2016, The price of a Brent barrel reached USD 36 at the end of that month. This rise meant an increase in the oil price of 33% in just 15 days.
The central banks are in charge of defining the monetary policy of the currencies of their areas of influence. In Europe. Mission is carry out by the European Central Bank. At the same time, in the United States, monetary policy is dictated by the Federal Reserve System, commonly known as the FED. Central banks’ primary tool to guide monetary policy is the variation in interest rates.
As has been verify, politics plays a decisive role in the evolution of the prices shown in the analysis charts. A simple phrase or advertisement can make thousands of investors earn millions of dollars in a minute, and others lose millions. For this reason. Every investor must understand that it is essential to closely follow international news and have access to the leading economic portals.
The world’s financial markets are highly interrelate. So almost always. every action has its effect elsewhere:
Exchange rates will always subject to international economic events, large-scale political events. And significant macroeconomic announcements.
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