Thanks for your previous answer – I always really appreciate how helpful you are.
Now I have a bigger question.
Equity market indexes.
I intend to track the performance of the equity markets of the major currency pairs’ countries.
Until now I haven’t traded equities so I really don’t know what index represents what, since there are more indexes in most of these countries, and especially in the US there are many equity indexes.
It would be good to know the relative performance of the equity markets in these countries. The performance of the equity markets as a whole, in each country.
Maybe it could be good to have a feel about
- how the country’s currency performs relative to its own equity markets; and
- how the equity markets perform in these countries relative to each country.
Could you please be as specific as possible, regarding the following?
Which indexes should one track? Could you specify for these 8 countries/regions (USD, EUR, CAD, GBP, JPY, AUD, NZD, CHF) which equity market indexes represents the country the best?
Is there one particular index for each of these countries that very well represents the country – or one should rather track two or more indexes because indexes represent sectors?
Please also tell me where can I check these indexes – this is the easier one, since I think all of them can be checked on Bloomberg.com or other financial websites…
but also the ticker symbols of these. Maybe there are more symbols for these indexes at different vendors, on different websites or at different trading companies
An index represents a collection of prices of various stocks from a certain sector or market. So lets say someone wanted to know the price of IBM stock, well they just type in the ticker symbol of IBM and they get it. But what if someone wanted to see the movements of the general market, instead of a specific stock? They have stock indexes that are a collection of various stocks. So if someone wanted to know what the broad stock market was doing, they can look at what the S&P is doing.
If someone wanted to look at what a certain sector of the market was performing, say the energy industry or the banking industry, they have an index for those as well.
It is true that in each country there are multiple indices. However, there are only a few major ones that you can keep track of if you want to.
Mostly, I keep track of the S&P 500, Nasdaq, Dow Jones Industrial Average, and the Nikkei index. Most of the trades I place for the stock futures market occur in the S&P futures contract, though occasionally I may place one in one of the other indices.
It is true that there are differences between each country’s stock index performance. What influences the performance of the stock index of each country? Well the general global macro events can influence all the stock indices of the world. So risk appetite / risk aversion can effect all the stock indices of the world. Then after that there are country specific forces that can move a stock index up or down. Changes in growth and inflation are some macro forces. You can just use the S&P scenario sheet which gives you the template that you can apply to each country: http://orderflowforex.com/sp-500/
Interest rate cuts, Quantitative easing, weaker currency can all cause a stock index of a country to go higher. For example, Comparing the S&P 500 and Nikkei performance in 2013, the S&P went up around 30% including dividends, while the Nikkei went up around 50%. What accounted for the difference? Well the Bank of Japan did a big QE program (even bigger than Federal Reserve as a portion of the Japanese economy), and also the Japanese Yen depreciated by 20%. So all that QE and currency depreciation, led people to aggressively buy up Japanese equities. Some macro traders operate under the theory that a weaker currency spurs exports and helps growth, so they bought the Japanese stocks, and since a lot of those stocks make up the Nikkei index, the index rose in value.
I think the most important index is the S&P – since it is one of the most liquid, most followed financial instruments in the world. I follow it not only because I believe it can help me some of the time figure out what is going on in the currency market, but also because I do place trades in it from time to time.
Bloomberg is a decent website for following the indices, though if you can find something that gets a lot of them on the same screen, and updates it in real time, that would be better.
To break it down by country you could say:
Again, I personally do not follow all of them. I just focus mainly on the S&P, with less attention to the Nasdaq and DJIA, and then also a bit of attention to the Nikkei.
With regards to foreign exchange impact of movements in a stock index, it would depend on the reason why the stock index is moving. For the last week, there was some risk aversion from slower China news, so that caused some AUD selling, JPY and CHF buying, etc. I would have to analyze and figure out the reason why the stock index is moving, etc and why the currency pair is moving and seeing if there is a relationship or insights that can be gained from it.
There are all sorts of other relationships that exist and macro scenarios that have occurred in the past between the currency pair and the stock index.
One scenario is the one I talked about above, with a weaker currency, helping to cause a stock index to go up. However, there are other scenarios where a currency is getting weaker due to some sort of country risk / country problems. A recent example is in Turkey, where the Turkish Lira has been depreciating for the past 2 months, while the Borsa Istanbul 100 index has been going down as well.
Other scenarios that can play out are if a currency gets too strong, it can cause growth to slow in an economy and cause the stock exchange of that country to stop going up, or go down, etc.
For example, comparing the FTSE 100 to the S&P, the FTSE only went up around 13% or so in 2013, while the S&P rose 30%. What accounted for the difference? Well the Fed has a much more aggressive and open ended QE program than the BoE, and also the British pound was up slightly for the year as well, so that may have restrained the UK economy’s potential.
There are so many different scenarios you can try on. That is one of the primary jobs of a great trader. Keep playing out different scenarios in your mind with different catalysts and see which one fits the current market moment. It is an endlessly fascinating game I tell you!