Idiots Guide To Market Relationships

It’s likely you’ve been told not to trade when an economic announcement is made - and for 15 minutes afterwards. It’s also likely that you look at an economic calendar to figure out when to NOT trade - but ignore it other than that.

These announcements and other economic related news (like the recent Trump tariff announcements) have the power to instantly change the direction and participation in the market for an extended period of time. If you were waiting for a technical setup, it’s likely that the announcement invalidated it. 

At the same time, the announcements bring in new opportunities that traders rarely exploit because they think it requires an in-depth knowledge of economics. In this article, we’ll dispel that myth and look at how simple it is to understand the responses to various types of US Markets.

That way, if your market reacts to an event, you consider that in your assessment of trading in that direction.

Let’s review the relationship between the main markets first.

The “trick” is to understand how seemingly ‘unrelated’ news can hit your market. Like interest rates hitting the dollar or oil impacting the stock market.  

Note that if I say “a strong X makes Y go down, presume the inverse is the case too.

US Stock Market - Reflects optimism or fear in the US economy.

Impacts:

• The Dollar - surging markets attract investment from overseas, increasing the demand for dollars.
• Interest Rates - Overly strong stock performance can have the Fed increase interest rates, to cool them off  by making it more expensive for companies to borrow. Weak markets can see interest rates cut to stimulate the economy
• Energy - Rising markets reflect economic growth, which means more demand.
  Precious Metals - considered a safe haven, rising markets may reduce demand as the need for a “safe bet” isn’t so strong.

US Dollar - Has both global and domestic impact.

Impacts: 

• Stock Markets - If the dollar is too strong, it can hurt stocks, especially in companies that export as it makes their products more expensive. 
• Interest rates - may be dropped if the currency is rising to high because of the markets to cool things off. 
• Energy - A stronger dollar makes oil more expensive for non-US buyers as they need to buy oil in dollars. That can weaken oil prices.
  
• Precious Metals - A stronger dollar typically pushes down gold prices as fewer dollars are needed per ounce.
  

Interest Rates - Set by the FED - used like a power up/down button for the US economy

Impacts:

• Stock Market - Higher rates make it more expensive for companies to borrow money. Bonds are considered less risky than stock and rising interest rates make the more attractive relative to stocks - both can drag stock prices down.
• Dollar - Let’s say a bank in the UK pays 3% interest but the US 5% interest, it would make sense to move your money from UK to US to get the better interest rate. To do that you buy dollars, pushing up the price of the dollar.
• Energy: Higher rates slow growth in companies, leading to less need for energy and pushing oil prices down. So yes - the FOMC can definitely move the oil market. 
• Precious Metals. Bonds are considered a “safe haven” as are precious metals. But bonds pay a yield too, whereas Gold doesn’t. There’s an opportunity cost in holding Gold over Bonds (I accidentally wrote Bong there for a second - Freudian) - as interest rates rise money moves from Gold to Bonds.

Energy - Well - Oil mostly, which is driven by geopolitical events as much as local US events. For example if an Oil refinery is attacked in the middle East.

Impacts: 

• Stock Market - Goods don’t get shipped around the planet/country without Oil. As oil prices go up, profits go down, eventually hurting stock prices.
• US Dollar - Higher oil prices can both weaken stocks and cause inflation as companies’ increase prices to pay for the oil. Inflation = currency depreciation, leaving people to look elsewhere.
• Interest rates - If oil prices create inflation, the interest rates get increased in an attempt to reduce inflation.
• Precious metals - Gold is considered a “hedge” against the dollar, if oil prices cause currency depreciation, Gold will go up as people move money there to protect the value. 

Precious Metals - Gold is considered a “safe haven” and so is a barometer of fear and greed in the markets. In most cases, Gold doesn’t so much impact other markets but is a reflection of them

Relates to:  

• Stock Market - If Gold rises, it can indicate uncertainty in stocks..
• US Dollar - As Gold rises, it is usually accompanied by a weaker dollar (although it’s more an effect than a cause).
• Interest Rates - Again more of an effect than a cause but spiking Gold may indicate expectation of a drop in interest rates.
• Energy - If Gold prices are rising because of inflation, then that could indicate rising energy prices.
  
  In short:
  

If we relate it back to economic releases and news in general - both the FOMC (interest rates)  and Employment numbers can move the oil market - but the amateur Oil trader might only be paying attention to oil inventories. 

The PMI or “Purchasing Managers Index” comes out monthly and tracks new orders and other factors in the manufacturing and service industries.

If orders are up, then that’s good for Stock Prices, which in turn is positive for energy prices and negative for Gold. 

The thing to watch with economic numbers is how far off they are from their estimated value or from the previous value if no estimate exists. Note also that some (red below) tend to have higher impact than others (green below)

economic release calendar in Jigsaw daytradr and Journalytix

As you can see the ISM PMI is 53.5 (which means more orders etc) compared to an estimate of 52.6 and a previous month of 52.8 - all good for stocks. Here’s a list of the top 10 releases, so you can get a feel for how they can impact your market.

On the left we have the event and what it means for other markets when the number is higher than expected. Note that the “S” implies a strong relationship and “W” implies a weak one. 

This might seem a lot to remember - but it’s mostly common sense. The key is that an economic event CAN dramatically change the ‘personality’ of your market.

They are an essential piece of the puzzle when it comes to understanding the evolving story of the day in the markets. Taking advantage of this knowledge is way better than what most do - ignore it completely.