Fundamental analysis

Forex fundamental analysis

Just like in any other market, in capital and money markets investors put their money at risk by evaluating potential future profits and risks. On the other hand, these markets are governments, corporations and other institutions that raise funds for their activities. Market participants constantly assess both the potential profit that can be obtained from these investments and the risk that must be taken into account.

The result of this assessment is influenced by new information, constantly coming to the market. Changes in profit/risk balance estimates result from changes in trading assets in the markets. What information should be monitored?

Information types you can follow

Monetary policy

Monetary policy maintained by central banks directly affects capital and money markets, as it regulates the supply of money and, thus, directly affects their value

Economic relations

Economic relations have a major impact on how investors perceive local markets. If there are strong trade relations in the country, investors consider this country economically stable with the possibility of increasing profits.

Situation in other markets

The situation in other markets is important when considering an investment decision, regarding where and when funds should be transferred between countries. When capital markets in one country move in the direction opposite to a trend, investors start suffering losses, capital move out of the country and provoke the depreciation of the local currency.

Company Situation / Reports

One of the important factors affecting capital markets is the current economic state of individual companies. The positive economic situation of the company may encourage investors to invest their capital in its shares. The bad economic situation, in turn, forces investors to move their assets to other companies and/or eventually withdraw capital from the country.

Legal acts and taxes

Legal acts, local or international, can have medium and long-term effects on capital markets. Legal acts can create barriers, or vice versa – act as an impulse for foreign economic investment.

Weather

Weather directly affects the prices of goods, which in turn affect the companies that use these goods as raw materials. Rising commodity prices also increase the cost of production. This, in turn, depending on the type of enterprise and company, leads to a decrease in profits and adversely affects the company's reporting. The deterioration of the economic situation leads to a fall in stock prices, which in turn forces investors to withdraw capital from this company.

Political situation

Political situations or conditions have a significant impulse in capital markets. When there is a stable political situation in the country (external or internal – international policy), investors comfortably invest in this country. On the other hand, in times of political instability, traders can respond by withdrawing money from a given market or region.

Economic downturn

An economic downturn may have various sources. It can be financial (for example, a banking crisis) associated with goods (for example, the oil crisis), political, etc. It is common that during a recession, people tend to withdraw capital from the market in order to "escape the worst moment". Therefore, banking and finance, tourism, automotive, etc. are the most risky.

The economic growth

The situation of economic growth in a country or region is favorable for companies that sell their products to consumers in this field. Economic growth, as a rule, means that customers are more optimistic and in a better economic position, thus they can afford more and are predisposed to making real purchases. The expected increase in profits of companies selling more and more of their products can attract both local and foreign investors, which create demand, resulting in an increase in prices for company shares.

Consumer confidence

Consumer confidence indicator reflects the big picture of how people in the country perceive future prospects. It is also one of the factors taken into consideration by central banks in the formation of monetary policy. In general, high level of consumer confidence means that they are more optimistic and willing to spend more on consumption, and, as a result, companies will be able to sell more products and get higher profits. Consequently, the attractive prospects of companies may attract investors, believing that the value of shares in the future will grow.

Events

Single events can have a significant impact on capital markets. A good example is the organization of the Olympic Games, which requires large investments in infrastructure to attract tourists to the region, and which provides a positive incentive for participating companies. On the other side of the scales, there are negative events, such as terrorist acts. These are rare cases, of course, but shortly after the 9/11 terrorist attack in the United States — the main stock markets were closed due to severe consequences for the capital market. Events in one company, as a rule, do not affect common markets, although there are exceptions. An example of such an exception is the case of Enron, in which more than 20,000 employees were dismissed because of allegations of financial fraud, after which ENRON was bankrupt. What matters is not the number of laid-off employees, but the scale of the enterprise being one of the main energy companies. Investors should carefully monitor events for the reason that the effects on capital markets cannot always be predictable.

Expert forecasts

Expert forecasts may correspond or contradict investors' expectations. As a rule, they do not have a direct impact on capital markets, but the sentiments of market participants may be affected when "experts" represent national authorities – either political or monetary. When monetary authorities make statements about the economy as a whole, they can give signals about future performances or hints about the future of monetary policy. This, in turn, may affect the money supply and the interest rate (the latter is the most interesting factor for foreign investors). Please consult with an independent financial advisor if you have any doubts about the specification of market instruments and mechanisms.

Fundamental analysis

Forex fundamental analysis

Just like in any other market, in capital and money markets investors put their money at risk by evaluating potential future profits and risks. On the other hand, these markets are governments, corporations and other institutions that raise funds for their activities. Market participants constantly assess both the potential profit that can be obtained from these investments and the risk that must be taken into account.

The result of this assessment is influenced by new information, constantly coming to the market. Changes in profit/risk balance estimates result from changes in trading assets in the markets. What information should be monitored?

Information types you can follow

Monetary policy

Monetary policy maintained by central banks directly affects capital and money markets, as it regulates the supply of money and, thus, directly affects their value

Economic relations

Economic relations have a major impact on how investors perceive local markets. If there are strong trade relations in the country, investors consider this country economically stable with the possibility of increasing profits.

Situation in other markets

The situation in other markets is important when considering an investment decision, regarding where and when funds should be transferred between countries. When capital markets in one country move in the direction opposite to a trend, investors start suffering losses, capital move out of the country and provoke the depreciation of the local currency.

Company Situation / Reports

One of the important factors affecting capital markets is the current economic state of individual companies. The positive economic situation of the company may encourage investors to invest their capital in its shares. The bad economic situation, in turn, forces investors to move their assets to other companies and/or eventually withdraw capital from the country.

Legal acts and taxes

Legal acts, local or international, can have medium and long-term effects on capital markets. Legal acts can create barriers, or vice versa – act as an impulse for foreign economic investment.

Weather

Weather directly affects the prices of goods, which in turn affect the companies that use these goods as raw materials. Rising commodity prices also increase the cost of production. This, in turn, depending on the type of enterprise and company, leads to a decrease in profits and adversely affects the company's reporting. The deterioration of the economic situation leads to a fall in stock prices, which in turn forces investors to withdraw capital from this company.

Political situation

Political situations or conditions have a significant impulse in capital markets. When there is a stable political situation in the country (external or internal – international policy), investors comfortably invest in this country. On the other hand, in times of political instability, traders can respond by withdrawing money from a given market or region.

Economic downturn

An economic downturn may have various sources. It can be financial (for example, a banking crisis) associated with goods (for example, the oil crisis), political, etc. It is common that during a recession, people tend to withdraw capital from the market in order to "escape the worst moment". Therefore, banking and finance, tourism, automotive, etc. are the most risky.

The economic growth

The situation of economic growth in a country or region is favorable for companies that sell their products to consumers in this field. Economic growth, as a rule, means that customers are more optimistic and in a better economic position, thus they can afford more and are predisposed to making real purchases. The expected increase in profits of companies selling more and more of their products can attract both local and foreign investors, which create demand, resulting in an increase in prices for company shares.

Consumer confidence

Consumer confidence indicator reflects the big picture of how people in the country perceive future prospects. It is also one of the factors taken into consideration by central banks in the formation of monetary policy. In general, high level of consumer confidence means that they are more optimistic and willing to spend more on consumption, and, as a result, companies will be able to sell more products and get higher profits. Consequently, the attractive prospects of companies may attract investors, believing that the value of shares in the future will grow.

Events

Single events can have a significant impact on capital markets. A good example is the organization of the Olympic Games, which requires large investments in infrastructure to attract tourists to the region, and which provides a positive incentive for participating companies. On the other side of the scales, there are negative events, such as terrorist acts. These are rare cases, of course, but shortly after the 9/11 terrorist attack in the United States — the main stock markets were closed due to severe consequences for the capital market. Events in one company, as a rule, do not affect common markets, although there are exceptions. An example of such an exception is the case of Enron, in which more than 20,000 employees were dismissed because of allegations of financial fraud, after which ENRON was bankrupt. What matters is not the number of laid-off employees, but the scale of the enterprise being one of the main energy companies. Investors should carefully monitor events for the reason that the effects on capital markets cannot always be predictable.

Expert forecasts

Expert forecasts may correspond or contradict investors' expectations. As a rule, they do not have a direct impact on capital markets, but the sentiments of market participants may be affected when "experts" represent national authorities – either political or monetary. When monetary authorities make statements about the economy as a whole, they can give signals about future performances or hints about the future of monetary policy. This, in turn, may affect the money supply and the interest rate (the latter is the most interesting factor for foreign investors). Please consult with an independent financial advisor if you have any doubts about the specification of market instruments and mechanisms.

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