As with every market, investors put their money at risk in the capital and money markets on the basis of assessment of the relations between potential future profits and risks. On the other side of these markets are government, corporations and other institutions, raising funds for their activities.
The market participants are constantly evaluating both the potential profits that may be generated by those investments, as well as the risk that has to be taken for such a promise. The result of such an assessment is influenced by the new information coming to the market all the time. The changes of the assessment of the profit/risk balance results in changes of the assets traded on the markets. What information is to follow?
Some chosen types/categories
of information to follow
Monetary policy maintained by central banks directly influences capital and money markets, as it regulates the supply of money, thus directly influencing its cost.
Economic relations have a major impact on how investors perceive local markets. If a country has developed strong trade relations, investors may see this country economically stable and with opportunities to increase profits.
Situation on the other markets
The situation on the other markets is crucial when considering an investment decision related to where and when capital should be transferred between countries. When the capital markets in one country start to turn red, i.e. investors start to make loses, capital will move out from the country which may also cause the local currency to depreciate.
One of the important factors influencing the capital markets are the current economical conditions of individual companies. A good economic situation of a company may cause the investors to invest their capital in the shares of such a company. A bad economic situation will in turn cause investors to move their assets to other companies and/or eventually withdraw capital from that country.
Legal acts and taxes
Legal acts, either local or international, may have rather medium to long-term effects on the capital markets. Legal acts may constitute barriers, or the opposite – act as an impulse for foreign economic investments.
Weather affects directly the prices of commodities which in turn affects companies using those commodities as raw materials. An increase in the prices of commodities also makes product prices increase. This in turn, depending on the business type and company, will cause demand to lower, affecting the companies statements, i.e. earnings. The worsening economic condition will make the price of shares drop, which in turn makes investors withdraw capital from that company;
Political situations or conditions have important impacts on the capital markets. When a country has a stable political situation (either internal or external – foreign policy) investors feel comfortable in investing in that country, so there should be an observable capital inflow to that country. On the other hand, in a situation of political turmoil traders may react by withdrawing the funds from the given market or region.
Economic recessions may have different sources. These may be financial (e.g. Banking crisis), related with commodities (e.g. Oil crisis), political or other. The common thing about recession is that in general people tend to withdraw their capital from the market in order to “save for worse moments”. Therefore the most affected segments are banking and finance, travel, automotive and others.
The situation of economic growth in a given country or region is strongly favourable for companies that are selling their products to the customers in that area. Economic growth typically means that customers are more optimistic and have a better economic situation, thus may afford more and are also more willing to make the actual purchase. Expected increase of the profits of the companies selling more and more of their products may attract both local and foreign investors, who generate demand and consequently increase the price of the shares of the company.
Confidence indicators reflect the broad picture on how residents of a country perceive the prospects for the future. It is also one of the factors taken into the consideration by central banks, when shaping their monetary policy. In general, a higher confidence from customers may suggest that they are more optimistic and willing to spend more on consumption, and as a result, the companies will be able to sell more and achieve higher profits. Consequently, the attractive prospects of the companies may attract investors, believing that the value of shares will be higher in the future.
One time events may have a significant impact on capital markets. A good example may be the organisation of the Olympic games in a given area, which requires extensive investments in infrastructure and attracts tourists to the region, and which has a positive stimulus for the companies involved. On the other side of the scale are more severe events, such as acts of terrorism. These are of course rare situations, but soon after the “9/11” attacks in the US – major stock markets were closed due to the severe implications to the capital markets. Occurrences in one company usually do not affect the general markets, although there are exceptions.
An example of such an exception could be the ENRON case, where over 20,000 employees were fired due to financial fraud accusations, after which ENRON turned out to be bankrupt.
The importance was not necessary because of the number of people that got sacked, but the size of the company which was one of the major energy companies.
Events must be followed very closely by investors due to the fact that the implications on the capital markets are not always clear.
Expert opinions may confirm or contradict what investors were, until that time, expecting. Typically it does not have a direct influence on the capital markets, however the market sentiment may be affected when “experts” represent national authorities – either political or monetary. When monetary authorities make comments about the general economy, they may be giving signals on future interventions, or hint at the future monetary policy. This in turn will have consequences on the supply of money and interest rates, the latter being the most interesting factor for foreign investors.
Please obtain independent advice from an independent financial advisor if you have any doubts as to the instruments’ specifications and the market’s mechanisms.