How FOMC Announcements Influence Traders and Markets

How FOMC Announcements Influence Traders and Markets

How FOMC Announcements Influence Traders and Markets

The largest central bank defines the currents of money, stocks and commodities with just a few words

The FOMC is announcing its last rate decision for 2014 today and as usual it will be accompanied by a statement and press conference. Traders around the world will be focused on two parts – the interest rate number itself, as well as the two most important words in the statement – how long the rate decision is planned to hold.

But why are stock markets, forex pairs and even commodities so heavily influenced by this largely planned announcement that many try to predict?

The reasons are many and overlap with each other, but the single most crucial one is that by controlling and changing interest rates and providing future guidance, the Federal Reserve exerts pressure and/or control over an extremely large amount of money and other financial resources. If the not the largest.

The FOMC (short for Federal Open Market Committee) is a committee within the Federal Reserve System (often referred to as the Fed) that has two major mandates – maintaining control over inflation and keeping employment on healthy levels. This is done by the levers they control.

The future guidance for the U.S. economy is the first one. Whether there is an imminent downturn or happy days ahead, this concerns traders, as the indexes and stocks they are buying or selling operate in this environment. All this on the other hand changes the amount of dollars in actual circulation and might make the Fed intervene on the forex markets.

The second is the interest rate, which falls under Fed jurisdiction and dictates the rates for transactions between private banks. If the rate is high, the overall cost of doing business is also higher and this cools down the economy and lowers inflation. If the rate is low then businesses can take credits with low interest, fuelling activity and job creation. If no actual changes are announced, then traders try to decipher the intentions of the central bankers in the statement and press conference.

There is no better source for basing your decisions on. The FOMC is built up of some of the smartest and most informed people around – the twelve voting members in the committee, containing the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. They are the decision-makers.

Federal Reserve Districts Map
The twelve Federal Reserve districts

Trading the announcement is preferred by traders who prefer more volatility, as its aftermath offers sharper moves. Two general approaches can be discerned. The first one proposes that a position is taken up before the actual announcement and is effectively a prediction in a certain direction – traders select it based on their analysis and place stop losses on the other end. Some might also place a take profit level, but many prefer to monitor the market itself and exit with their profits when they see fit.

The second approach is to wait for the announcement to start pushing the market and trade right after it starts moving. Which is usually quite rapidly, occasionally even reversing its initial direction. This trading type is risky but offers the greatest possible returns, because the largest volume occurs at these times.

The latter approach can also be subdivided, depending on the specific tactic you are employing. You can enter right after the interest rate announcement or you might wait for the press conference of the chairman, who now is a lady named Janet Yellen. This press conference is closely scrutinized by market participants as it can give additional information or context for the announcement that came just before it. It has two parts, a scripted text that is delivered at the beginning and a Q&A session where journalists ask their own questions. This part can sometimes generate surprises, as answers coming from the chairman, despite the obligatory preparations, are sometimes made-up on the spot and can give too much information, or a different twist to the scripted and carefully worded statement.

This evening’s announcement will be quite interesting, as we’ve seen a strong drop in oil prices in the last months, which also has a heavy influence on the overall economy. Coupled with the free-fall of the Russian rouble that might be commented on by Janet Yellen, this will see traders looking for hints on how the Fed will (or won’t) react to the turbulence.

Everyone Trading Stocks pays attention to the “January Effect”

Everyone Trading Stocks pays attention to the “January Effect”

Everyone Trading Stocks pays attention to the “January Effect”

Is this another self-fulfilling prophecy or a trap for traders

Just like the “Santa Claus rally”, the so-called “January Effect” is used to describe the rise of stock market indexes in the first month of the year. The term was coined in 1942 by the economist Sidney B. Wachtel. Just like the one between Christmas and New Year’s Eve, the January Effect is mainly explained by year-end tax reasons, but its occurrence has been less frequent of late.

The effect is often mentioned by analysts to describe the increased investor activity at the tail end of the previous year and at the start of the new one. Over the years several other reasons have contributed to the propagation of this belief. Just like with the Santa Claus rally, bonuses of Wall Street brokers invested immediately in stocks drive prices higher, as well as the “window propping” that portfolio managers do to make their investment funds look better.

January is also associated with a surge in activity by retail investors. This is explained by pure seasonality and the start of new investments, purely due to it being the beginning of the year. For instance individual investors might also make annual additions to their investment accounts – usually both of these involve the buying of stocks, not shorting them – giving more fuel to a potential climb in overall prices.

If we look at the statistics, the January effect is clearly visible from data as far back as 1927 – returns are at an excellent level of 3.9% for the Dow Jones. But if we take a closer look at the the period between 2000-13, then the lines get more blurred and we can see a drop of -1.55%. This might confirm that the phenomenon evens itself out and proves the existence of market efficiency, another interesting subject that will be among our future subjects.

Playing into the opinion that January is more random come the quarterly earnings reports at the end of the month (although they cross over in February), we can see surprises. These reports contain the financial statements of all public companies and reflect the last three months of the previous year. The holiday shopping season is usually a good gauge for this and provides a solid predictor for wider industry performances, but predicting how these earnings reports will pan out is a different game altogether.

In any case the January Effect, or rather the market performance in January, is seen as a major predictor for the whole year and it is indeed one of the most interesting months for traders. Perhaps lately too many people are aware of its importance and their actions are influenced by marginal factors and not the fundamentals, but as we know all too well, nothing is written in stone when it comes to the markets.

Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

We take a closer look at one of the most important economic announcements each month

With the next Non-Farm Payrolls (NFP) announcement from the U.S. coming up tomorrow (5.12.14), we decided to break down the reasons why this particular bit of data attracts so much attention from traders.

The dry, technical definition for these payrolls is the change in number of employed during the last month, excluding those in the farming industry (for reasons probably linked to the picture above). It’s released monthly always on the first Friday after the month has ended.

The report itself contains hints about the condition of the U.S. economy, with the exception of said farming sector, which generally has a small portion of the labour force employed, but skews the overall data due to seasonality. The sample for the payrolls is huge and gives a good picture of the overall situation in “real-time” – when it comes to such big amounts of human generated data getting it a week later is as close as it gets.

Before the release of the data we have a forecast which has guided market participants to this point on what has happened in the labour market. After the number comes out of the hat, if it’s better than the forecast, that means that more people were hired by companies. By proxy, this means that businesses have confirmed projects and plans and need to fill working places. In this sense it’s considered as a reliable indicator of business climate in real time, because it’s based on measurable data from contracts between employees and employers.

The second level of interpretation is that the confirmation of more existing jobs also means more confirmed spending, as people will get salaries and use it in different ways, fueling different industries. There are also many other ways to read the data, but these are the main two.

So how should you interpret the numbers that come out. The usual reaction of the markets is that if the announced number is higher than the forecasted one, then that is something good for the U.S. dollar and it gains ground against other major currencies. This happens due to the fact that literally more dollars will be spent in the real economy and there will be demand for them.

Stock markets and the companies that comprise their indexes are also to gain from more people employed, because of the knock-on effect we mentioned from people with salaries who spend them in different sectors.

If the numbers are weaker than the forecast, then we can see the opposite effect – weakening of the dollar and a slump in stock prices.

Another important point to have in mind is that the NFP number comes out with the trade balance and the unemployment rate (as is the case tomorrow). While the trade balance is released for the month before (so the data is 35 days old), the unemployment rate is also based on information about the previous month and shows how many people are officially out of a job and have to rely on the welfare system, gathered from those who are employed.

When the data comes out from the Bureau of Labor Statistics the first thing market participants do is to quickly compare it to the forecast number. This is preferred to only comparing it to data from the previous month, as the forecast is what has been guiding the markets in the last several weeks and is based on different indications.

Quite often we see volatility in the stock market and occasionally in the forex one. For day-traders this is a good opportunity for entries in new trends that move sharper across the charts and provide more percentages or pips to trade on. However longer-term traders prefer to take into account only the hard data and prefer to steer clear of the exact moments following the announcements, instead waiting for things to calm down and then enter their positions.

Most affected from the announcement are the major U.S. indexes such as the Dow Jones, the S&P 500 and the NASDAQ, as well dollar related currency pairs. But the numbers do frequently influence the opening of the Asian and European trading sessions on the next day, as U.S. consumers are still regarded as the largest and most potent economic force in the world.

The latest Non-Farm Payroll data will be released tomorrow at 1:30pm GMT and you can follow any changes in the markets through your account in Trading 212 PRO.

Earnings Season is Upon Us – Here is Why Traders Care so Much

Earnings Season is Upon Us - Here is Why Traders Care so Much

Earnings Season is Upon Us - Here is Why Traders Care so Much

With major companies across the world poised to report their earnings and sales, traders gear up for interesting times

Earnings season is one of the busiest times for traders because it provides ample volatility and price movements for almost all companies that come out with results. This happens four times a year and is eagerly anticipated by the investing community, as it provides measurable data and hard facts about company performance – suitable conditions for making a judgment call on where stocks are headed.

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