Did you know that the best way to identify the impact of economic events is through the market indices? As you may already know, an index is a basket of stocks that represents a portion of the market.
As a trader, whether you’re new or have been trading for quite some time, you should be aware of the economic events that shape financial markets. There are many ways to stay updated, such as by watching the news, and turning the notifications of your trading platform.
But how do economic events affect indices? In this article, we’ll help you learn more about the relationship between economic events, and you can easily observe them on indices.
1. Changes in Interest Rates
The interest rates set by the central banks are the major form of economic event. Whenever the central banks change the interest rates, it significantly impacts indices.
For instance, when there’s an interest hike, it’s not advisable to spend more as it usually results in the stock market indices. On the other hand, interest cuts make it more interesting since it pushes indices higher. Additionally, businesses tend to borrow and invest more capital due to lower rates.
Central banks often have goals like lower inflation and stable economic growth. They set the interest rate to control the flow of money.
2. Inflation Reports
Another economic event that often affects indices is the inflation reports. Inflation is when the rate of goods and services becomes higher. As the inflation rate changes, the cost of living can also be affected, including the profits of businesses and purchasing power.
For instance, if inflation is high, consumers can only buy fewer things with the same amount of money they have. As this continues, the economic growth slows, and it negatively impacts the stock indices.
Meanwhile, if there’s a moderate inflation rate, it’s a good sign that economic growth is moving forward, including indices.
3. Gross Domestic Product (GDP) Reports
GDP or Gross Domestic Product report can tell whether an economy is healthy or not. However, since trading happens internationally, you should be aware of the GDP reports of the countries where the indices you’re trading in are based.
Once you know the reports, you should understand whether the GDP growth is positive or negative. A positive GDP growth is usually interpreted as a sign of a healthy economy, which means there’s a rise in stock indices. On the other hand, negative GDP growth usually causes a drop in indices.
4. Unemployment Data
The employment rate also affects the performance of stock indices. If there’s a high unemployment rate, the economy struggles since consumers spend less money, and businesses lose profits. Meanwhile, a low unemployment rate means that consumers spend more, and businesses gain profits. In the long run, its impact on stock indices improves.
So, if you’re interested in index trading, you should first be aware of how to know whether the rate of unemployment is low or high. Besides, this is a great key to knowing if you can be confident in trading indices.
5. Corporate Earnings Reports
While a corporate earnings report isn’t considered an economic event, it can still influence a significant part of the market indices. Usually, the bigger the companies are, the more their impact on the indices.
Similar to other economic events, there are two sides to corporate earnings reports— positive and negative. Of course, if the corporate earning report of a company is positive, it means they’re generating profit and the certain index is ideal to trade. Meanwhile, negative earnings mean that the company isn’t doing so well, so it’s best to lie low on trading the said indices.
6. Geopolitical Events
Various events may affect the performance of indices. In terms of geopolitical events, such as wars, elections, and trade deals, the process and results may significantly influence the market indices.
For instance, if the investors are still waiting for the election results, indices may fall since there are still no clear new policies. Meanwhile, in terms of successful trade agreements, they can also help indices to have better performance.
7. Natural Disasters and Pandemics
Pandemics and natural calamities can greatly affect the decline of stock indices. In the recent Covid-19 pandemic, the market indices around the world declined as the lockdown started. Good thing there are measures released by governments, which helped indices get back on their feet.
So, whenever there’s news about typhoons, other natural disasters, and infectious diseases, you should prepare yourself, and start altering your trading strategies.
Final Thoughts
As a trader, you should always look out for economic events that can significantly affect market indices, especially if you’re interested in trying to trade various indices. As you know, indices can help in diversifying your trading portfolio, so it’s recommended to trade indices once in a while.
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specialises in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.