Fundamental Analysis

Beginner

In this Master Academy educational video and article, we are looking at the basics of Fundamental Analysis.

Fundamental Analysis

There are FOUR subcategories that come under the banner of Fundamental Analysis:

  1. Macroeconomic Data Analysis
  2. Central Bank Analysis
  3. Geopolitical Events and Geopolitical Risk Analysis
  4. Microeconomic Analysis and Corporate Data

Below we look at these in more detail with examples.

1. Macroeconomic Analysis Data

The economic data for an economy impacts on financial markets assets.

The macroeconomic data implies the possible future for the economy and therefore how financial markets assets related with that economy will change in price going forward.

There are various tiers of data, usually designated as Tiers One, Two and Three.

Tier One data would include; Gross Domestic Product (GDP), Employment and Inflation (Consumer Price Index, CPI)

Tier Two data would include; Purchasing Managers Index (PMI), Industrial Production and Retails Sales

Tier Two data would include; Housing Data, Trade Data and some other Sentiment Surveys

Here we see the S&P 500 equity index rally for the first four months of 2019 in reaction to improving US macroeconomic data.

Daily S&P 500

2. Central Bank Analysis

Each major economy or economic region has a Central Bank.

CENTRAL BANKCOUNTRYABBREVIATION
Federal Reserve of United StatesUSAFED
European Central BankEUROPEECB
Bank of EnglandUNITED KINGDOMBOE
Bank of JapanJAPANBOJ
Reserve Bank of AustraliaAUSTRALIARBA
Reserve Bank of New ZealandNEW ZEALANDRBNZ
People’s Bank of ChinaCHINAPBoC

 

Central Banks can have a substantial impact on financial markets. Traders, investors and analysts aim to forecast changes in Central Bank assessments on the future path of interest rates.

The traders, investors and analysts need to monitor Interest Rate Decisions, changes to Quantitative Easing Meeting Statements and Minutes, plus Central Back Speeches, if they are Hawkish or Dovish.

Central Banks – Hawkish/Dovish

Hawkish

  • More concerned on inflationary forces
  • Favouring higher interest rates

Dovish

  • Less concerned on inflationary forces
  • More concerned with Growth and Employment

ECB Example

  • The ECB were less dovish than market participants were expecting.
  • This de facto is more hawkish.
  • It produced a significant leap higher in the Euro versus the US Dollar FX rate (EURUSD currency pair.

5 Minute EURUSD

3. Geopolitical Events and Geopolitical Risk Analysis

Geopolitical events include the likes of wars, trade wars, weather, terrorism and are very difficult to predict and analyse. Nevertheless, financial markets analyst DO try to have an understanding of these geopolitical impacts and make predictions.

Trade War Example

After the announcement of possible tariffs on Mexico by the US in early June 2019, we see the considerably negative impact on the Mexican Peso, which saw USDMXN higher.

Daily USDMXN

4. Microeconomic Analysis and Corporate Data

Microeconomic Analysis involves looking at corporate data and financial statements to make forecasts

This would include:

  • Earnings Reports
  • Net income
  • Revenue
  • Profit Margin
  • Debt-to-Equity Ratio
  • Price-to-Earnings Ratio
  • Mergers and Takeovers

Revenue Example

In late April 2019 Alphabet (parent company for Google) declared worse than expected Q1 2019 revenue

This produced a stock price plunge of 8% in one day, then still lower through May as analyst amended forecasts lower too.

Daily Alphabet

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