Here are my views on the top 5 macro-economic factors which affects financial markets and the role they are playing under the current market scenario.
- Interest Rates
One of the key macro-economic factors, it’s a good indicator to judge a nation’s level of development and state of the economy. Falling interest rates usually indicates that the economy would be getting stronger since borrowings would increase thereby boosting demand and consumption. On the other hand, a tightening monetary policy (one where the central banks raise interest rates) is usually used to slow down an economy which has been rising too fast or the inflation has been climbing too quickly. Under the current market scenario, US may be under pressure to curb the interest rates due to the slowdown of the trade wars. This will be a good sign for the economy and the RBI (which has already cut the rates twice this year already) may further lower the interest rates. This could be positive for the domestic markets in general.
Markets usually love high GDP (Gross Domestic Product) since a high GDP indicates that the income levels in the economy are generally higher. This could translate into higher demand and consumption would increase, thereby boosting industrial production. GDP as an indicator is used widely to gauge the overall economic outlook of the country. If there is uncertainty around economic outlook, the risk averse investors would usually stay away from the markets to avoid volatility. A slow GDP growth rate could result in slowdown in consumption and an overall liquidity crisis which is not good news for the markets.
- Political Scenarios (Domestic)
Markets love stability in the government and its policies. This was the main reason for the bull run in the past one month as the recent election results gave the markets exactly what it wanted – a stable government. Coupled with the expectations of reforms in the upcoming budget, the domestic cues coming to the markets have been very positive esp. for the NBFC and real estate sectors.
- International Markets
The international cues have not been very favorable in the recent past and rising tensions due to the US-China trade wars have been playing its toll on the domestic markets as well. In general, restrictive trade practices are not a welcome move and financial markets would usually react negatively to such policies especially when coming from giant superpowers such as US and China. However, falling crude oil prices has proven to be positive for the markets as it improves the overall current account situation of the economy. Many sectors such as OMCs, Banks, Tyres, Airlines, etc. are affected by the changes in crude oil prices, and a drop in the price helps in increasing their profitability.
- Geographical Conditions
Talking specifically about Indian markets, monsoon plays a huge role in uplifting investor sentiments as a good monsoon indicates good amount of rural demand and overall demand. That said, the work done in improving the irrigation systems over the past decade has left the country in a better place to deal with low monsoon. At the same time, if rainfall is not spatial, i.e. it is concentrated in a few areas and distributed across the country, it can do more harm than good. Hence the investors must look beyond the overall monsoon figures before making any decisions based on that.