Transcript Fundamental Analysis - Mercantile Exchange Nepal Limited

Fundamental Analysis
- Basic Level
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Disclaimer
This presentation is being provided solely for
informational purposes. Mercantile Exchange Nepal
Limited does not warrant the accuracy or
completeness of any information provided in this
presentation and such information is provided without
any correctness or condition of any kind. Neither
Mercantile Exchange Nepal Limited nor any other
person associated with the creation of this
presentation or its contents shall be liable or
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damage that may arise in connection with the use of
this presentation, including without limitation, any
indirect, third party, or consequential damages.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Fundamental Analysis
• The study of the factors that affect physical supply and
demand.
• General economic principle says demand and supply
determine price.
• Demand and supply situation helps predicting the
price of commodities.
Generally,
– Demand > Supply = Higher Prices
– Supply >Demand = Lower Prices
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Factors affecting demand and supply
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Production and consumption Level
Trade practices
Government interference
Taxes
Political Events
Weather
Transportation cost
Technological change, etc
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Factors affecting commodities price
• Every major economic indicator released from major
economies impact their respective currencies.
• Positive economic data strengthens the currency and
negative data weakens the currency.
• This impacts the price of commodities accordingly.
• US dollar is regarded as the strongest currency that
impacts commodity prices.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Relationship between indicators
• Inflation and interest rate, impact the Currency
which ultimately impacts the price of commodities.
• For Example:
– if the inflation is rising in US, then demand for US
currency will decline as their export becomes
expensive.
– In this scenario, the currency of major trading
partners of the US will strength.
– The price of Crude oil declines with the prospect of
weaker US economy.
– A weaker US dollar generally strengthens gold
prices.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major economies to follow
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USA
Eurozone
China
Japan
Middle East
BRIC nation
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major Fundamental Indicators
• Fundamental indicators released from
– US
– Euro zone
– China
– Japan
– emerging economy
impacts the commodities market.
• US Economy
– being the world’s largest economy has the biggest
influence in the world economy.
– US economy plays a bigger role in guiding currencies
and commodity market.
• However,
– one cannot ignore the fact that due to integrated global
business environment, Euro zone, China, Japan and
other emerging country’s fundamental indicator also
play a bigger role in commodity market.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major Fundamental Indicators
• Monetary Indicators
• Economic Indicators –
– US
– International
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major Fundamental Indicators
• Monetary Indicators
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Market in Crisis
One of the major news that can severely affect the market is monetary
policy changes by major economies, we give three examples
• A) Quantitative Easing ( US federal reserve)
• B) Euro Zone stimulus
• C) Chinese stimulus
Quantitative Easing 2, November 3rd 2010
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
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Euro Stimulus, June 24th 2009
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Chinese Stimulus, November 2008 (discharged over 2009-2010)
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
• Adverse news affects the market for commodities
• The start of the financial crisis started with the realization that
many big financial companies were in trouble. The main crisis
was in the housing market and this became evident when series
of news reports from mid-July to August confirmed the fear.
• Conversely, good news such as stimulus packages builds market
confidence and rallies the prices of commodities that are demand
driven.
• During start of the financial crisis, Oil hit a high of around $145
mark and tumbled all the way to around $35 in a matter of 6
months.
• In the next slide, we see a series of events that led to the financial
crisis and its relation to the Crude Oil price decline.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
July 11, 2007, Standard and Poor’s places
612 securities backed by subprime
residential mortgages on a credit watch.
July 24, 2007 | SEC Filing
Countrywide Financial Corporation warns of
“difficult conditions.”
July 31, 2007 | U.S.
Bankruptcy Filing
hedge funds that invested in
various types of mortgagebacked securities.
August 17, 2007 | Federal Reserve
Press Release
Following an intermeeting
conference call, the FOMC
releases a statement about the
current financial market turmoil,
and notes that the “downside risks
to growth have increased
appreciably.”
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
February 13, 2008 | Public Law
110-185
President Bush signs the
Economic Stimulus Act of 2008
(Public Law 110-185) into law.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major fundamental indicators…
• Economic Indicators - US
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Employment situation
Weekly unemployment claims
Retail sales
GDP
Industrial Production/ capacity utilization
ISM report - Manufacturing
Chicago Purchasing Managers Index
Consumer price Index (CPI)
Producer Price Index (PPI)
Productivity and cost
Consumer confidence index
Durable goods orders
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Major fundamental indicators…
• Economic Indicators – International
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German Industrial Production
German IFO Business Survey
German Consumer Price Index
Japan Tankan Survey
Japan Industrial Production
OECD composite leading indicator (CLI)
Industrial production of China
Industrial activity in other BRIC countries
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Market sentiment
• Commitment of Traders (COT) report
• Released by CFTC on weekly basis
• COT reports provides a breakdown of each Tuesday
open interest for markets in US.
• The reports includes open interest separated by
reportable and non reportable position.
• For reportable position additional data is provided for
commercial and non commercial. The data includes:
– Changes from previous report
– Percents of open interest by category
– Number of traders
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Useful resources
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www.forexfactory.com
www.bloomberg.com
www.marketwatch.com
www.cnbc.com
www.cftc.gov
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
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