When we trade in the financial markets we have an opportunity to make a huge profit and its size directly depends if we have correctly estimated the investment attractiveness. And the loss size depends on this as having bought an unprofitable asset we can lose our money. The method helping us to understand the time to invest to this asset is fundamental analysis. Like in the market you buy the thing after you have examined it, checked the quality and agreed with its price. In the financial markets you can estimate a good or investment object after you have examined the market situation and studied its economic indicators. It is a subject to trading in the stock market where you try to understand either to buy the stock or not by using the accounting reports of the company having issued these stocks. The attractiveness of the company is determined by its profitability, efficiency, stability and dividend rates. All these factors are the indicators of the company’s climate determining its investment attractiveness. But except the internal factors directly affecting the stock price there are the external factors affecting the whole industry. These factors have influence not only on the stock market but also on the forex and commodity markets. We are talking about the indicators of the country’s economy or the basic fundamental indexes.
As you know an improvement of the country’s economy actually affects the companies (national and foreign) and the prices of raw materials and national currency rates affecting the country’s whole economy afterwards. It is a sort of endless circle: when the economy is short of money the companies start investing less to their development, the investors start taking their fund out of the companies, the currency rate starts reducing due to the capital outflows and all this makes the currency unattractive for investments and the economy becomes short of money again. Understanding how the changes of basic economic indexes affect the market help us to forecast the further behavior of major players, conform it and make a profit. Having seen the first signals of economic problems the investors will react and take out the money and it will lead to reduction of the national currency rate. At this moment we join to the big traders having bought a national currency put option. To see these signals we should understand them.
At first we should understand what indicators can tell us about the economic situation. There are some economic indicators we should know:
1) Production of goods and services - the more goods and services the people produce the richer they become and thereby the country’s economy becomes better;
2) Job market – the more people are occupied in goods/services production the more money people have and thereby they will buy more goods and services;
3) Purchasing power of money (inflation) – the higher the inflation rate is the higher salary the employer pays making progress for cost saving on the one hand and the more money the employee spends promoting the economic progress on the other hand;
4) Home demand and consumption – the consumer’s confidence and being ready to spend money generates a demand for different goods creating the manufacturer and seller’s income;
5) State – the effective tax and interstate payment management of the government causes the businessmen’s confidence in their future that helps them to make a progress investing to their businesses;
6) Business activity - a subjective indicator helping to understand business sentiments and estimate the expected future development of the country (a low business activity and optimism level will cause a slowdown in the economic growth).
All these factors help us to understand the situation in any economic sector. Let us consider each group in details.
The first indicator of the country’s situation is GDP – the gross domestic product. GDP is the total number of goods and services produced in the country for a definite period. If it grows the economy and its attractiveness also grow. The other indicator is Industrial Production Index. As a component of GDP it helps us to understand the situation in the main economic sector as the economic growth will be slow without it. To clearly understand a situation in the production sector they use such indexes as Capacity Utilization and Productive Efficiency. A balance and growth of both indicators show a health of the production sector. Industrial Orders Index will help us to foresee the changes in the industrial production – the growth of Industrial Orders Index shows the production and GDP growth accordingly.
Unemployment Index shows a market situation and if it grows the economy reduces. To remove seasonality impact on understanding the job market situation we have the Employment Index without agricultural data. There is also the indicator forecasting Unemployment Index - Unemployment Claims Index.
We can estimate the inflation according to two factors:
* Consumer Price Index - the price rate for consumer goods and services;
* Industrial Price Index - the price rate for equipment, semi-finished and final products.
The changes in these indexes show a speed-up or slowdown in the economy due to the inflation growth or reduction.
Home Demand and Consumption
Retail Index and Durable Good Orders Index show the level of home demand and consumption. Retail Index growth indicates people’s welfare and having enough money. Retail Index growth for durable goods (refrigerators, TV and others) shows the confidence in the future and economic progress of the country. Changing of the consumer confidence index is a good indicator of the sentiments in society and their readiness to spend money in future.
Surely the main indicator of the country’s economy is a budget because its deficit or proficit shows the tax management efficiency of the current government. Ineffective budget management causes distrust of the big investors and capital outflows from economy and the country. Also a good indicator of government efficiency is a balance of internal and interstate payments. Proficit of the payment balance shows much money come to the economy and it is attractive for investors. There is also Trading Balance Index showing a difference between export and import and depending on the economic orientation. The country-exporter’s balance deficit indicates the efficiency of institutions and growth of money inflows.
As we mentioned Business Activity Index is a subjective indicator based on interviews with senior managers of the major companies and showing their business optimism regarding to their companies. Its growth tells that the businessmen are confident in their future and ready to invest funds to their businesses and this will cause the future economic growth.
As you see tracking the economic indexes (indicators) helps us to foresee the future economic situation and understand a reaction of major players in the market. When you know how the bigger participants react on any index changes we can use it to make a profit trading in the same direction.