In this Master Academy educational video and article, we are looking at the basics of the different approaches to analysing financial markets that come under the titles Fundamental Analysis and Technical Analysis.
There are FOUR subcategories that come under the banner of Fundamental Analysis:
- Macroeconomic Data Analysis
- Microeconomic Analysis and Corporate Data
- Central Bank Analysis
- Geopolitical Events and Geopolitical Risk Analysis
Below we look at these in more detail with examples.
1. Macroeconomic Analysis Data
The big economic data for an economy or a region has an impact on financial markets assets.
This is because this macroeconomic data indicates the potential future path of the economy (or region) and therefore has consequences for how financial markets assets associated with that economy will change in price in the future.
In the below example, the S&P 500 equity index pushed higher through the first four months of 2019 until April, reacting to improving US macroeconomic data.
2. Microeconomic Analysis and Corporate Data
Microeconomic Analysis involves looking at corporate data and financial statements to make forecasts. Analysts try to predict the future price of stocks and shares by monitoring company data, announcements and events.
In the below example, Alphabet (the parent company for Google) announced far worse than anticipated Q1 2019 revenue, which saw the stock price plunge 8% in one day, then continued to go lower, as analyst revised their forecasts lower.
3. Central Bank Analysis
Central Banks can have a significant impact on financial markets, including Government Bonds, stock and Forex. Analysts try to predict possible changes in Central Bank views on the path of interest rates.
In this example, the ECB was less dovish than market participants were expecting, and this de facto more hawkish tone produced a significant leap higher in the Euro versus the US Dollar FX rate (EURUSD currency pair).
4. Geopolitical Events and Geopolitical Risk Analysis
Geopolitical events such as wars, the weather, terrorism, trade wars etc, are extremely difficult to predict and analyse. Nevertheless, financial markets analyst do try to have an understanding of these geopolitical influences and make predictions from this analysis.
Below we can see the significantly negative impact on the Mexican Peso, which saw the US Dollar push higher against the Mexican currency USDMXN higher, after the announcement of possible tariffs on the Mexico by the US in early June 2019.
Whereas Fundamental Analysis looks at the cause of price movements, Technical analysis studies the effect of global news and events. Technical analysts don’t need to know the cause of market movements.
Technical analysts or Chartists analyse the price action on charts and make future predictions and projections of the future price path based on prior price action and activity.
Principles of Technical Analysis
- The price discounts everything
- Price moves in trends
- History repeats itself