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  • 1. Economics for Journalists Week 8: Financial Markets Jeffrey TimmermansMonday, 19 March, 12
  • 2. Types of markets ✤ Commodities ✤ Stocks ✤ Foreign Exchange (Forex) ✤ Bonds ✤ DerivativesMonday, 19 March, 12
  • 3. Methods of trading ✤ “Open outcry” floor trading (NYSE) ✤ “Over the counter” electronic trading (Nasdaq) ✤ “Dark pool” private markets ✤ Bilateral trading (only two participants)Monday, 19 March, 12
  • 4. Market participants ✤ Retail investors (ordinary ✤ Companies people) ✤ Governments ✤ Institutional investors ✤ Insurance companies ✤ Brokerages ✤ Hedge funds ✤ Pension fundsMonday, 19 March, 12
  • 5. Types of participants Investment Information Leverage size Retail investors Small Public Small Institutional Public & Large Large investors Private Public & Governments Huge Unlimited PrivateMonday, 19 March, 12
  • 6. Why do they participate? ✤ To gain access to capital (funds) for new or existing ventures ✤ To put excess funds to use and earn money ✤ To hedge (insure) against risks ✤ To speculate (bet)Monday, 19 March, 12
  • 7. Price formation in markets ✤ Participants wanting to buy make a “bid” at a certain price for a certain amount of an asset ✤ Those wanting to sell announce an “offer” (or “ask”) price and amount ✤ Participants revise their bids or offers until they find a matching offer or bid ✤ All participants can see this informationMonday, 19 March, 12
  • 8. Photos: Bloomberg (left), AP (right)Monday, 19 March, 12
  • 9. The importance of prices ✤ Market prices are set after matching bids and offers ✤ As such, they reflect the market’s consensus view on the value of assets ✤ They reflect market participants’ expectations ✤ Prices are news!Monday, 19 March, 12
  • 10. Commodities markets ✤ Some major products traded: gold, oil, rice ✤ Almost all commodities trading done via futures contracts ✤ Futures allow participants to lock in a price for a transaction to take place in the future ✤ Thus market prices for commodities represent expectations for the futureMonday, 19 March, 12
  • 11. Stock markets ✤ Allow companies to raise funds by selling shares to the public (“go public”) ✤ After an initial public offering (“primary market”), shares are traded daily on the market (“secondary market”) ✤ Companies typically offer investors (their owners) a quarterly or annual dividend paymentMonday, 19 March, 12
  • 12. Indexes & Averages ✤ Summarize the aggregate change in prices of individual shares in a market or sector ✤ DJ Industrial Average, Nikkei 225 Average, Hang Seng Index, Hang Seng H-share Index ✤ Averages are just the mean of all prices adjusted by a fixed multiplier ✤ Indexes are weighted so bigger shares have a bigger impact on the change in the indexMonday, 19 March, 12
  • 13. Market data Screenshot of a Reuters 3000 terminalMonday, 19 March, 12
  • 14. Causes of stock market moves ✤ Corporate earnings (profits) ✤ Especially expectations of future profits ✤ Interest rates ✤ Economic outlook (GDP growth/contraction) ✤ Prices for raw materials/inputs (e.g. oil) ✤ War/terrorism/natural disastersMonday, 19 March, 12
  • 15. Forex markets ✤ Five main global currencies ✤ US dollar, Euro, Yen, Sterling, Swiss franc ✤ Daily global volume of around US$4 trillion ✤ Forex price quotes are in pairs of currencies ✤ EUR/USD, USD/HKD, USD/JPY, HKD/JPYMonday, 19 March, 12
  • 16. Causes of Forex moves ✤ Interest rates for short-term movements ✤ Rate increases associated with appreciation ✤ Inflation for medium-term movements ✤ High inflation associated with depreciation ✤ Current account (trade) imbalances for longer-term ✤ Surpluses associated with appreciation Source: “A Concise Guide to Macroeconomics” by David A. MossMonday, 19 March, 12
  • 17. Interest rates ✤ If a country’s interest rate is higher than the rate in other countries, that country’s currency tends to appreciate as investors switch into the higher-yielding currency ✤ Carry trade ✤ Borrowing in a low-yielding currency to buy assets in a high- yielding currencyMonday, 19 March, 12
  • 18. The Law of One Price ✤ A dollar should buy the same amount of goods or services in every country around the world ✤ The definition of purchasing power parity ✤ Inflation (or deflation) can throw parity out of whack ✤ If prices rise faster in the U.S. than in Japan, Japanese goods become more affordable in the U.S.Monday, 19 March, 12
  • 19. Trade imbalances ✤ Demand for a country’s goods & services from overseas will tend to lead to a trade surplus and an appreciation in that country’s currency as overseas consumers need that currency to buy those goodsMonday, 19 March, 12
  • 20. Bond markets ✤ Bonds are quoted in prices and yields ✤ Prices and yields move in opposite directions: if the price goes up, the yield goes down ✤ The coupon represents the regular interest payment received by bond purchasers ✤ Most bonds are issued at a price of 100 ✤ Therefore, at issue yield and coupon are equalMonday, 19 March, 12
  • 21. Monday, 19 March, 12