Its imperative that you factor in fundamental news to your trading algorithm. One of the worst sentiments that we come across when trading options or forex is that there is no “need” to factor in news if you understand how technical analysis works. NOT TRUE!
Here are some of the most important economic events that shape Retail stocks and currencies.
For Options Traders
1. Federal Reserve rate announcement: The Federal Open Market Committee’s (FOMC) interest rate announcements have always been among the biggest market-moving events. But in 2013, the Fed’s moves assumed unparalleled importance, as investors waited with bated breath to see if the central bank would continue to inject $85 billion monthly into the U.S. economy through bond purchases (the third round of quantitative easing or QE3), or if it would slow the pace of these purchases. Given that U.S. equity indices were at record highs in October 2013, an investor with a substantial long position in U.S. stocks who was looking to hedge potential downside risk could have done the following right after the Fed’s Oct. 30 announcement:
- Trimmed positions in highly profitable equity positions to take some money off the table.
- With market volatility near multi-year lows at that time, the investor could have purchased puts either on specific stocks in the portfolio or on a broad market index like the S&P 500 or Nasdaq 100. Purchasing puts gives the investor the right to sell a stock for an agreed-upon price at some future time. If the security’s market price falls below the agreed-upon price, the investor gains by selling at the higher contractual price.
- Bought a certain amount of inverse exchange traded funds (ETFs) – which move in the opposite direction of the broad market or a specific sector – to protect portfolio gains.
While these reactive moves would typically be carried out after the Fed announcement, a proactive investor could implement these same steps in advance of the Fed statement. This reactive or proactive approach to an important event or piece of news, of course, depends on a number of factors, such as whether the investor has a high degree of conviction about the market’s near-term direction, risk tolerance, trading approach (passive or active) and so on.
2. U.S. employment situation summary (the “jobs report”): In terms of economic data releases, few are more important than the U.S. jobs report. Traders and investors closely watch the employment level, since it has a substantial influence on consumer confidence and spending, which accounts for 70% of the U.S. economy. Jobs numbers that miss economists’ forecasts are generally interpreted as signs of incipient economic weakness, while payroll numbers that surge past forecasts are seen as strength. In the summer of 2013, investors were unfazed by payroll numbers that came in below expectations, in the belief that any signs of economic weakness would cause the Fed to keep QE3 going. The investor playbook for trading jobs data in 2013 could be easily based on predictable market reaction, which was as follows:
- Payroll numbers below expectations: Implies that the Fed would be forced to keep interest rates low for an extended time period. The impact on specific asset classes was typically as shown in the table:
↔ (no clear trend)
↔ (no clear trend)
- Payroll numbers above expectations: Implies that the Fed may scale back the pace of asset purchases, which could send bond yields and market interest rates higher.
↔ (no clear trend)
↔ (no clear trend)
An investor could use these market reactions to formulate an appropriate trading strategy to implement either in advance of the jobs report or after its release.
3. Earnings reports: It is generally advisable to have a trading strategy in advance of an earnings report, because a stock can bounce around in a much wider range post-earnings, as compared to the swings in an index after a data release. Imagine having a huge short position in a stock and watching it soar 40% in the after-market because its earnings were much better than expected.
Trading earnings reports may not be required for every stock in one’s portfolio, but it may be necessary for a stock where the investor has a fairly large position, whether long or short. In this case, the investor needs to weigh the merits of leaving the position unchanged over the earnings report or making changes prior to it. Factors that should play a part in this decision include:
- The current state of the overall market (bullish or bearish);
- Investor sentiment for the sector to which the stock belongs;
- Current level of short interest in the stock;
- Earnings expectations (too high or comfortably low);
- Valuations for the stock;
- Its recent and medium-term price performance;
- Earnings and outlook reported by the competition, etc.
For example, an investor with a 15% position in a big-cap technology stock that is trading at multi-year highs may decide to trim positions in it ahead of the earnings report, so that it now constitutes 10% of the portfolio. This may be preferable to taking the risk of a steep decline post-earnings if the stock is unable to meet investors’ high expectations. An alternative option could be to buy puts to hedge downside risk. While this would enable the investor to leave the position unchanged at 15% of the portfolio, this hedging activity would incur a significant cost.
It may also make sense to trade an earnings report for a stock where the investor does not have a position but (rightly or wrongly) has a high degree of conviction. Key points to note are – avoid taking an unduly large position, and have a risk mitigation strategy in place to cap losses if the trade does not work out.
4. Bolts from the blue: What should you do if the screens suddenly flash news of a terrorist attack somewhere in the United States, or war looks imminent between two nations in the volatile Middle East? While this is one time when you may need to be proactive to protect your investment capital, a kneejerk reaction to sell everything and take to the hills may not be the best course of action. Over the years, financial markets have demonstrated a great deal of resilience by taking in stride the occasional terrorist attack, such as the bomb blasts at the Boston Marathon’s conclusion on April 15, 2013.
During times of geopolitical uncertainty, it may be prudent to rotate out of more speculative instruments and into higher-quality investments, and consider hedging downside risk through options and inverse ETFs. While you should scale back your equity exposure if it is uncomfortably high, bear in mind that in the majority of cases, the short-term corrections caused by unexpected geopolitical or macroeconomic events have proved to be quintessential long-term buying opportunities.
For Forex Traders
1.Central Bank Rate Decision
Each month the various Central Banks of the world’s economies meet to decide over the interest rates they are responsible for. The decision they have to make is whether to leave rates unchanged, raise rates or lower rates and the outcome of this decision is extremely important to the currency of the economy and as such, to traders.
An increase in rates is generally seen as bullish for the currency (meaning it will increase in value) and a decrease in rates is generally bearish for the currency (meaning it will decrease in value) whilst an unchanged decision can be either bullish or bearish depending on the perception of the economy at the time.
Whilst the actual decision itself is crucial, so too is the accompanying policy statement here the Central Bank gives it’s overview of the economy and how they view the future outlook. This is also where monetary policy is announced, which concerns vital matters such as the implementation of QE, which we explain thoroughly in our Forex Mastercourse.
Some of the best trades you can make come from rate decisions, for example, since the ECB cut the EuroZone rate to 0.05% in September 2014, EURUSD has since fallen by over 2000 pips.
The Gross Domestic Product is an important indicator of economic health in a country. A country’s central bank has expected growth outlooks each year that determine how fast a country should grow, as measured by GDP.
When GDP falls below market expectations, currency values tend to fall and when GDP outdoes expectations, currency values tend to rise. As such this figure’s release is keenly observed by currency traders and can be used to cautiously anticipate Central Bank movements.
When Japan’s GDP shockingly shrunk 1.6% in November 2014, the JPY fell sharply against the Dollar as traders anticipated further Central Bank intervention.
3.CPI (Inflation Data)
Consumer Price Index is the most widely used inflation measure out of the various economic indicators. The index gives information about the historical average prices paid by consumers for a basket of market goods and highlights whether the same goods are costing more or less for consumers.
Central Banks monitor this release to help guide them in their rate and policy setting. If inflation is seen to be evident, and moving beyond a certain target then interest rate rises are used to counter this.
In November 2014, Canadian CPI beat market expectations of 2.2% and came in at 2.3% with Canadian Dollar subsequently traded up to a six year high against the Japanese Yen.
The unemployment rate of a country is crucial to markets given its importance to Central Banks as an indicator of the health of an economy. Higher employment leads to interest rate rises as Central Banks aim to balance inflation with growth and as such this figure draws huge market attention from traders.
Alongside the Unemployment rate the two most important labour statistics are the US ADP and NFP figures released each month with the NFP taking prime position. This figure is so important we do an NFP preview each month giving you our analysis on the release and how to trade it. Given the market’s current attention to the likely date of a Fed rate hike, this figure is growing in importance each month.
The ADP data is considered an important predictive tool for the NFP as it is released beforehand.
Although the Central Bank meetings of all economies are extremely important, America’s Federal Open Market Committee meeting takes canter stage as the US Dollar is currently the world’s reserve currency.
Each month the committee meets to set rates and to give it’s pronouncement on current economic conditions and the effectiveness of current monetary policy, casting an eye forward to expectations of future economic conditions and adjoining monetary policy.
The committee is made up of members which vote at each meeting with “Hawkish” members those in favour of a rate rise and “Dovish” members those favouring a lowering of rates.
The statement released by the Committee is keenly scrutinized by traders looking for clues as to how the Central Bank will behave in future and even the most seemingly inconsequential of terminology can cause large market moves, as seen recently concerning the Fed’s usage and then removal of the term “patient”, regarding rate hikes.
FOMC meetings can cause huge market volatility as seen on March 18th 2015 when EURUSD spiked up 400 pips in a matter of minutes as markets perceived the meeting to be USD negative.
These Central Bank meetings are where we also learn about any changes in monetary policy, such as the announcement of quantitative easing. This is extremely important to currency traders and we explain this topic fully within our course.
Since the ECB announced their latest QE program on Jan 22nd of this year, EURUSD has fallen by over 600 pips
The key thing with all economic indicators and news releases is not just what the actual release means but how the market anticipates the release and subsequently reacts to it, this is where the trading opportunities are created. It can be extremely difficult for new traders seeking to trade news events as the volatility and uncertainty can be overwhelming, fortunately we have a fantastic suite of indicators which are perfect for trading news events.