However, as big as forex, commodity and bond markets are, and as much as they are connected to one another, it could be said that stock markets alone are the underlying driving force in the financial markets.
The reason for this is that stocks are the companies that drive our capitalist economy and it is they that are ultimately responsible for the things we buy and the way we live our lives. Because of this fact, stocks tend to be the leading indicators in markets.
By that, I mean stocks often move first before anything else. They often decline well in advance of recessions, they react first to important news outbreaks and they often indicate the best course of action for other traders to take.
When stocks are cheap
Stocks become cheap, generally, towards the end of a recession and after a decent bear market has taken place. During this time, corporate earnings have dropped substantially, economic growth has stalled and stock prices have shown signs of bottoming out.It is at this point that forex traders should be most optimistic and look to buy some of the currencies that will benefit most from an upturn in the economy. High growth currencies from emerging markets such as the Brazilian Real or the Turkish Lira, are likely to do well during the beginning phases of a new bull market in stocks. As are those currencies that have dropped the most during the preceding bear market, the British pound, or the euro perhaps.
It's for this reason that earnings season can be just as important a time for forex traders as equity traders.
When stocks are expensive
When stocks are expensive, it's likely that the bull market is in its final stage. Utility stocks and blue chips tend to be the only stocks making new highs and small cap stocks are starting to slide.Whenever stocks are either expensive or due for a correction, forex traders should act to avoid those currencies that have moved up in tandem with stocks.
Higher growth currencies such as the Brazilian Real or Turkish Lira should be exchanged for the safety of lower yielding currencies like the Japanese yen, the US dollar or the Swiss franc. These three currencies are the main safe havens for currency traders and should be sought out whenever there are signs of stress.
Editors’ Picks
AUD/USD pressures as Fed officials hold firm on rate policy
The Australian Dollar is on the defensive against the US Dollar, as Friday’s Asian session commences. On Thursday, the antipodean clocked losses of 0.21% against its counterpart, driven by Fed officials emphasizing they’re in no rush to ease policy. The AUD/USD trades around 0.6419.
EUR/USD extends its downside below 1.0650 on hawkish Fed remarks
The EUR/USD extends its downside around 1.0640 after retreating from weekly peaks of 1.0690 on Friday during the early Asian session. The hawkish comments from Federal Reserve officials provide some support to the US Dollar.
Gold price edges higher on risk-off mood hawkish Fed signals
Gold prices advanced late in the North American session on Thursday, underpinned by heightened geopolitical risks involving Iran and Israel. Federal Reserve officials delivered hawkish messages, triggering a jump in US Treasury yields, which boosted the Greenback.
Bitcoin Price Outlook: All eyes on BTC as CNN calls halving the ‘World Cup for Bitcoin’
Bitcoin price remains the focus of traders and investors ahead of the halving, which is an important event expected to kick off the next bull market. Amid conflicting forecasts from analysts, an international media site has lauded the halving and what it means for the industry.
Is the Biden administration trying to destroy the Dollar?
Confidence in Western financial markets has already been shaken enough by the 20% devaluation of the dollar over the last few years. But now the European Commission wants to hand Ukraine $300 billion seized from Russia.
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