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The Biggest Fundamental Events Analysis & Case Study

Hello, and welcome to this latest edition of courses on demand, brought to you by Forex dot Academy! In this course, we will be discussing those real-life case studies, considering fundamental analysis. Now there is, of course, inherent risk when deciding to trade the financial markets. So, just before we begin, please do take a moment to familiarise yourself with the following disclaimer.

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So, what, are we going to cover exactly in this webinar? Well, we’re going to discuss the overall economic environment of the markets that we trade, and then we’re gonna break down some really key or significant economic events through the course of the last ten years that really made a huge impact in actually changing how traders, perceive the markets. Changing the overall formulation of risk on or risk of approaches to investing, and trading, and obviously provide us with opportunity both in the long term, and some volatility in the short term, as well in terms of our study, as fundamental traders, or I suppose students of the markets it is essential that we know what we’re doing in these environments, and that leads us on to discuss whether we’re deciding to trade the bond markets or Forex pairs we need to know how these large economic events will affect the perception, are the real decisions that other market participants will involve themselves with, when deciding to put on positions, and trade these markets, and others no different from ourselves. So, let’s delve in to really discussing first, and foremost the trading the economic environment, and the trading of the macroeconomy. So, why does this matter? Why does the economy matter to us? As traders, the financial markets reflect the overall performance of the economy financial equity indices represent the overall business health of an economic region and their strength, and weakness bears a close connection to gross domestic product other asset classes such, as commodities bonds, and stocks, are therefore affected by the level of business on with activity circulating in the economy okay. So, as an overall growth perspective in terms of trading in the economy are those financial analysts out there they look to the GDP the gross domestic product to see whether we’re in a recessionary recovery or perhaps a boom period of growth, and that will indicate to us how strong an economy is in relation to its competitors, as well how do large economic events help shape the global economic outlook, and that will be the point of our lesson here large economic events can fundamentally change the way in which investors, and traders, perceive future economic growth, and stability they often cause a dramatic change in the level of risk and uncertainty over asset pricing, and that’s both in the short-term, and long-term, and we have seen that quite significantly in some of the topics we will discuss during the webinar the Brexit decision the massive depreciation of sterling, and the US election there with Donald Trump caused a lot of volatility, and then we’ve seen a total repricing of assets, as well. So, let’s delve into this in a lot more detail but first, and foremost, as us traders, how do we how do we perceive or how do we read the news how does it affect our opinion perhaps on the economy whether we have short ideas in terms of trading an asset like perhaps the global equity index for a two-month period how do we actually take this economic news in or these shifts in global sentiment into our trading let’s look at this for a moment we have a trader here concerned about some figures that he has heard or seen sort of releasing into the news the US economy expanded at an annualised two point nine percent on-quarter in the last three months of 2017 that’s higher than two point five percent in the second estimate on beating market expectations of 2.7 percent hmm personal consumption expenditures, are privately inventory investment, are revised up okay. So, we have the personal consumption expenditures, and private inventory investment, are revised up. So, we’re sitting here, as traders, were involving herself in this economic environment to make trading decisions how do we speculate, and how do we really try, and gather an understanding of what this means well this could cause volatility in the forex markets of course in the short term we can see different pricing in terms of what domestic nations were trading. And for trading as apparent against the US dollar we need to know, if that U.S. increase in gross domestic product, how that might affect the dollar in relation to those other currencies obviously we might love to trade the equities, are our baby we’ve got a long US equity trade here, if we have positive growth in the US economy, as well. So, there’s our light bulb. It’s working off some new trading ideas, and that is what we do as traders. Now that’s how we understand and trading this economic environment. So, let’s look at what we have here, and we sort of touched on it in some detail u.s. GDP growth rate and we have EU unemployment rate to charge to the left-h, and side our job, as traders, is to really bring this information over the two charts to the left onto our price action chart to the right, and speculate get involved trading these markets. So, first, and foremost GDP growth.

Well, we have a figure there relative in the last quarter of 2017. Quite strong with 2.9 percent. We can see how it relates to overall performance throughout the year, is it perhaps a bit in terms of estimates we know that it was, that will lead us to actually look for buying opportunities? And we can see the market has reflected in such a way we looked in perhaps for an EU unemployment rate it is continuously over the long-term going down there’s a good sign for us traders, here in Europe who, are considered to trade more often those European indices, are perhaps Forex pairs or any sort of relevance in terms of European markets that it’s supposed to be, and certainly will be in terms of fundamental decision-making be supportive. So, that’s what we do here in terms of trading the economic environment we look at these economic events or these economic data to formulate trading decisions over the medium to long-term in delving in understanding more about the economy we will become better traders. Now let’s delve into our real case a study number one which is of course Bragg’s it I’m sure most of us, are very familiar with this situation it was due to a referendum there ‪on the 23rd of June‬ 2016 the UK voted to leave the European Union this was a massive shock to the financial markets not only because most how expected the UK electorate would overwhelmingly support staying within EU but because it would have astronomical ramifications in how the UK would conduct business, and trade with its neighboring economies okay. So, that’s going to have long-term effects on trade relations in the short-term it generated a huge level of uncertainty over future trade relations continued economic growth employment, and immigration between nations, and of course political discord which might I say continues today such a fundamental shift in domestic policy for the UK government was sure to have very real effects on the financial markets particularly those securities related to Britain. So, the question I would like to pose, when we decide to fundamentally analyse these case studies is what fundamental changes took place, and what trading opportunities did it provide, and that’s really the point of fundamental analysis, as well remember it’s not to necessarily be correct it’s to make trading decisions, and look for those opportunities in the marketplaces. So, first, and foremost obviously an event of this magnitude of this scale is going to cause short-term, and long-term sentiment volatility whether you’re a Forex trader you’re going to know that’s going to cause more opportunity for you or whether it perhaps you’re holding long equity positions in the UK or across Europe obviously that’s going to have a really negative effect with the volatility in the short-term on your position, and potentially it could lead to some future opportunities in terms of speculation in trying to price in the surprises scenario, and obviously then the most immediate effect the financial markets would have been the depreciation a quick depreciation in sterling from around 147 to 132. So, quite a drastic move, and obviously that led to a more longer-term approach in terms of long-term depreciation in the currency that led them to a re-evaluation of the UK economy, and obviously if you’re an equity trader to a total repricing of UK equity markets. So, obviously we have seen a short-term volatility fundamentally we know that’s going to cause a lot of concern in the financial markets but, as the markets start to repress these moves these economic case events that we studied that leads to a total shift or a total repricing in such assets in particular here, as we discuss the UK equity markets just think of ourselves, as potential UK equity investors perhaps only owning portfolio of stocks there in the UK all of these shares, are going to be revalued based on the change in the actual currency itself the indicative currency that these, are priced in. So, let’s look at the chart here in front, and actually assess this fundamental case in a little more detail in terms of the price action well in front we have the Pound u.s. dollar Forex cable market, and we can see obviously the big engulfing con of the sticks out like a sore thumb there a depreciation or devaluation of that currency from 147 to 132 almost overnight. So, we have it a 10.2 percent drop in a 48-hour period that is of real concern for forex traders, particularly obviously, if you’re trading those currency pairs valued across the pound sterling pairs, and obviously, those assets that, are related to those pairs. So, any real commodities that come from the UK whether they’re import or export commodities any assets such, as the equity markets mentioned would have been gravely affected, and this is obviously going to change the entire sentiment of the market in the short-term, as the market starts to source to really reprice the risks reprice the uncertainty in terms of how the political discord will ensue on what it might mean for economic growth within the eurozone here we have the bracelet shock then we can see the intense volatility there adjust by observing the candlestick structure the Japanese candlestick structures during the weekend obviously we see the footsie closes on Friday evening at six thous, and three hundred, and fifty-eight, and after the weekend after the Bragg’s referendum vote it opens at five thous, and seven hundred, and seventy. So, that’s sort of mid-range in that very large candle there you would have seen the daily price action trader, and how’s the mantra to start to read prices move with the currency devaluation to see how it actually affects some of the big earners in there the export boom companies, and starting to actually repress the performance of the faulty, as an equity index we see the price move out quite sternly, and obviously in three to four period come back up to new levels then we see the brexit after months the markets totally revalue the composition of the footsie 100 index, are suggested, and traders, pricing that future value of export firm growth, and this inevitably is something that is quite a shock to the market, ironically leads to a period of boom within the UK economy, in terms of the market structure repricing those assets, and in terms of actually looking at the trend in front we can see it actually fundamentally, this fundamental case serves to support economic growth to the upside. ‬

So, let’s move on to our real case study number two, and discuss the Swiss National Bank the Swiss National Bank is responsible for the monetary policy of Switzerland, and just like any other Bank it does aim to provide growth, and stability of the domestic economy by working towards target inflation rates, and price stability considering the geographical significance of Switzerland, and it is very important that the nation, are strong, and perhaps favourable trade relations with its European neighbours even though it does not share the domestic currency with the single euro mechanism the SNP or Swiss National Bank announced on the 6th of September 2011 that it intended to address changes in the value of the Swiss franc to the euro aimed at depreciating the currency cap to 120. So, as to remain competitive to its neighbours then on the 5th of January 2015 the Swiss National Bank made an unexpected announcement to the markets that they believe the euro crisis had passed, and that they were no longer following the euro currency arrangement. So, let’s take a step back for a moment, and try, and assess this scenario fundamentally for the nation of Switzerland, if we think we have at this time a euro crisis where we have negative interest rates across some regions, and obviously there’s a lot of concern that this euro sovereign debt crisis is going to deepen we see a country geographically like Switzerland, and right in the centre of all this controversy, and they want to continue their growth, and continue their business amongst the calamity what they’ll want to do, if we think of the composition of the SMA which is the Swiss market index the leading equity index there in Switzerland, and we have companies like Nestle the chocolate maker then we have Novartis Roche some of these companies, are huge exporters in terms of global dem, and, and obviously would do most of their business, and in the eurozone so. Now that we know fundamentally the reason for the Swiss National Bank pegging their currency to 120 euro, and obviously the aftermath of actually Pauline a peg how can we assess them, and look to see what happened in the currency markets well we have here the euro Swiss franc, and inevitably we can see an absolutely huge move to the downside that prism was a huge amount of fear, and uncertainty and obviously the fact that it was such a sudden announcement is going to cause increased volatility to the downside we’ve seen literally the floor has been pulled from this market the support has broken at 120 Fundamental was the case, and really the notion or the directive from Thomas Jordan, and from a Swiss National Bank to actually send this currency back to a level of equilibrium in terms of national domestic currency in relation to the eurozone it it’s his biggest partner in terms of trade relations let’s move forward, and to discuss in our real case study number three, and that is the infamous collapse of Lehman Brothers. So,, if you have been a financial trader, are just genuinely interested in the markets, and the economies over the past 10 15 years or generally just interested in the financial recession, and crisis that we had there this is certainly a case study of interest Lehman Brothers was one of the largest investment banks on Wall Street it was perhaps the first big bank to capitalise on the growth of the US mortgage organisation market where massive amounts of profits were being made on u.s. home loans by 2006 it had merged with many active lenders across America. So, much that it had appeared to do almost all of its investment business in collateralised real estate, and only a portion in traditional financial investment this era of investment growth coincided with the rise of the shadow banking industry, and financial leveraging that monumentally increased Lehman’s exposure to the mortgage market. So, in a little detail, if you’re unaware of the shadow banking industry, you may have seen the movie ‪the big short‬ it’s simply where all of these financial firms learned to package, and bar that together reprices it was good that settled on throughout the financial system. So, that Laird obviously to all of this being joined collectively, and spread systemically throughout the system times of economic boom ensured that such investments were profitable however the significant portion of its assets allocated to managing housing loans meant they were vulnerable to a market downturn, and of course more vulnerable to an eventual market downturn in the housing market itself which is eventually what happened during the later months of 2007, and early 2008 it was clear there had been a housing bubble all led by the easy availability of credit, and the ease at which was to get a mortgage loan accepted property prices quickly began to fall, and millions of mortgages became unaffordable, and un-payable overnight, and that happened millions of Americans wear their homes effectively their mortgages turned into negative equity over a very short space of time while enjoying profits during the boom Lehman’s over leveraged exposure to the mortgage market meant that a 4% decline in the value of its assets would entirely eliminate its book value of equity on the 15th of September 2008 Lehman Brothers filed for chapter 11 bankruptcy protection it had accumulated a total holding of over 600 billion in US assets 600 billion dollars in US assets quite a substantial amount the collapse of Lehman Brothers was not only an economic disaster for the US housing market it brought into question the systemic risk these financial institutions caused to the entire global financial system another certainly really the story of this case, and really the bullet point in terms of being a student of the financial markets, when you study the shell banking industry, and these banks the question at the time was, are these banks perhaps too big to fail, and of course there was discussion at the time between those in government, and those in the private sector whether they could actually floater or keep blaming brothers above water, and how that would actually affect the financial system they agreed at the time that they simply could not they also went on to build many other banks art but let Lehman Brothers evidently collapse it being the largest investment bank on Wall Street. So, a very significant period of history in the U.S. let’s look at how this real case study the actual collapse of Lehman Brothers affected the markets in looking at the economy we have here the S&P; 500 daily chart over a long period of time we can see the market downturn shows us a lot of volatility another is representative of the serious amount of concern or uncertainty that a market participants, and traders, are feeling, as we see the fresh news flow perhaps mortgages denied housing sector fall outs all of these things will come into the news and cause volatility to the downside. So, we see the downside with the reality of the housing bubble itself it became clear banks, and financial institutions where indeed overexposed but particularly the size the too-big-to-fail phenomenon, and really affected the downturn, and was the catalyst for price movement, when it became clear that Lehman Brothers was simply not too big to feel under the entire banking system was indeed in jeopardy, and that’s what we’ve seen in terms of the price follow-through, and I inevitably caused the catalyst for the 2008, and global recession in some more detail in terms of analysing this fundamentally what does this mean for us, as traders, over the long-term we know that as investors in the community you’ll generally go through four to five periods within your own lifespan also considering how long you live, but we do go through the business cycle periods of booms, and busts, slumps, and obviously there, are intermittent, and recessionary periods within that. ‬

So, here within GDP we have our boom, and bust cycles we see the collapse of Lehman Brothers just entered the markets they’re causing a bit of a catalyst, as the market free price this whole phenomenon we see a large investment bank take the hit collapse due to the massive it mortgage exposure in this in this space, and then we obviously see the slump with our financial crisis there 2008, and continuing on to even deeper slum periods. Now in aiming fundamentally to analyse why exactly or one reason why we were able to come out of this recession area period, and back into a recovery or a period of economic boom we can study real case study number four, and others quantitative easing. Quantitative easing programs were first introduced by Japan in 2007 to battle deflation in the economy. The aim was to flow the domestic market with new liquidity to promote learning and stimulate the economy. So, generally speaking, they do this through the bond markets through the new issuance of debt, as a result of the global financial crisis of 2008 many global economy is still faced financial meltdown with worsening economic conditions unlimited credit availability at the time we refer to this, as the credit crunch. So, for many traders, out there I’m sure you’re familiar with the phrase there was intense volatility in the forex markets, as well, as the equity markets, and of course we felt this everyone felt this in terms of a pinch on the pocket with the objective of boosting the economy in the United States launched a program of quantitative easing in 2008 followed by the UK in 2009, and of course the European Union later the same year each central bank took on large-scale asset purchases assuming the burden of risk for their economies, and released fresh healthier liquidity back into the markets in order to stimulate lending and growth. So, let us refer back to our business cycle what we, are trying to do is actually recover from this economic recession this global financial crisis that has systemically affected our financial institutions, and caused unemployment across many nations, and effectively slowed growth what we, are effectively doing is trying to stimulate growth by increasing the money flow into the economy swapping a bad debt with good debt, and trying to increase lending. So, that consumer spending growth unemployment regains its stature in our economies here we have the financial crisis, and coming on from that with the period of slump there we introduced QE 1 that’s commencing in November 2008 with the US Federal Reserve started buying 600 billion in mortgage-backed securities on one point seven trillion dollars of bank debt then we have qe2 that’s November 2010, and that’s another 600 billion dollars of mortgage-backed securities in that purchasing program, and then, of course, September 2013 the US Fed launched 40 billion dollars a month open-ended bond purchasing program analyst to flood the market with new liquidity to increase that landing in the private sector across the corporate finance world, and then after a long period of prolonged period of perhaps six years of quantitative easing we see these factors start to come into effect where money supply has increased it is filtered through the rest of the economy we’re starting to see these finance institutions become healthier they’re starting to lend more to smaller business enterprises who in turn create business to hire staff which actually increases in the labor market, and then obviously consumer spending, and manufacturing start to grow, as well this all leads to the total financial recovery story, and we’re currently obviously just coming into a boom period where we’ve seen a very strong market bull run for the last two to three years. So, how did the financial markets react to this fundamental story of quantitative easing well obviously they know fundamentally they’re going to be supportive by the government, and that is the primary concern or issue with QE more generally speaking market prices, are said to be discovered price discovery is a function of participation between buyers, and sellers. So, this is a very unique period of our history where actually government institutions, and central banks directly interfered with that price discovery over the long term obviously it’s in effect to help the economy and stimulate growth, but in terms of pricing assets it led to support, and obviously long term price structures to the upside given the economic growth, and health of the economy. So, here in front we have the S&P; 500 this is the largest equity index in the U.S.A consisting of the 500 the top 500 companies by market capitalisation to the left we can see obviously the financial crisis caused a huge shift of market sentiment, and obviously we see the inevitable recession that we have bringing prices way down to new lows there, and February 2009 then what we see is a period of recovery just after but it does take time for the recovery to come in, and obviously this is a fundamental discussion of quantitative easing how long will it come into effect how long will those prices and a change is starting to feed into the economy but we do see sustained both over the long-term period, when looking at her sp500 given that this is a global financial crisis the question I would like to ask, and really have you, and observers how does it affect the rest of the global equities out there in the world let’s have a view here we have the nasdaq-100 we can see that the price structure is very similar we have the 4100 again we have a very strong move to the downside, and we can see, as we move across all these global equity indices the larger story of quantitative easing is a function of actually looking to support global growth that is a very similar story in terms of the fundamental base of quantitative easing, but we can see there, are little time shifts, and that’s more relative to the fact that QE was introduced earlier in the United States, and then in the UK then in the European Union we see these prices start to stabilise, and it never will be moved to the upside over the long run. So, let us delve into a real case study number five the European sovereign debt crisis the European sovereign debt crisis that took place in the European Union towards the end of 2009, when it became clear that most eurozone economies were still struggling with the challenge of economic recovery many nations had seen an increase in sovereign debt, as a result of banking system bailouts, and were unable to pay or refinance the government debt. So, that is the key, when, when really understanding at the function of debt or our interest rates the ability to actually repay those deaths, are on loans over a long period of time to underst, and the complexity of this situation we must underst, and how inextricably linked long-term interest rates, are to macro economic health a nation’s interest rate reflects the risk associated with its ability to lend to the financial markets. So, of course in layman’s terms those countries who have a higher perception of risk perhaps they’re going through tough times economically in this particular case we have Irel, and, and Greece of course Italy Portugal they were finding it very difficult to repay their debts, and obviously that risk involved, and actually purchasing alone perhaps a 10-year bond from the from one of those governments has an added perception of risk, and obviously would require a repayment of a higher level of return. So, it is a simple risk reward ratio, when deciding my bonds or priced unlevel of interest rates to those bonds with many EU nations unable to refinance their debt massive uncertainty Andriod the bond markets causing dramatic volatility, and a surge in many domestic interest rates this effectively collapsed the bond market some countries, and led to a huge increase in unemployment for those worse affected. So, effectively what we were witnessing in the European sovereign debt crisis was the inability for many of these nations to effectively pay back their debt to the European Central Bank many of these countries had obviously taken bailouts, and we’re giving bailouts by the ECB to help stimulate domestic growth in their national economy but of course these, are loans, and these have to be pared back, when the economic performance of these nations didn’t it didn’t seem to grow in the same perspective of the bailouts, and obviously they were experienced a serious level of austerity and difficulty in doing. So, and in growing their economy, and recovering those challenges came to the front where effectively it was very difficult to pare back and make their obligations in terms of paying back debt to the European Central Bank. So, let’s look at our case study chart here what we have is long-term interest rates over the period from July 2008 to January 2018. Now in analysing or long-term interest rate short we can see that there, are two countries that really stick out for us, and both Portugal with the blue line, and Irel, and with the green line respectively what this chart tells us really is that there’s a large spike in interest rates over the period roughly July 2010 to October 2012 that would present problems for Irel, and, and Portugal in terms of trying to refinance their government operations in the bond markets giving that they would have to pay back a level of percentage interest on perhaps two h, and % we have 12.5 a peak in Irel, and they’re roughly around 13 14 % peak there with Portugal reflecting of course the overall uncertainty or perhaps perception that they could not effectively repair these loans or their bonds back in a given period of time another all constitutes the level of risk these economies, are facing at the moment one of the countries not included in our long-term interest rate short give it’s a real case study in terms of study in European sovereign debt crisis is Greece, of course, Greece had been hit very hard by the financial crisis, and it’s trouble to remain competitive, as a Euro trading partner in the eurozone was really pushed into question, and this is because really they got bailed out time, and time again, and could not repay their debt, and almost went bust several times.

So, what I’d like to do is actually pinpoint this, and I’ll call it in black that we can annotate ourselves here we have April 2010 8% which is in, and around this period we have around 10% we can see already that it is leading the way in terms of this increased volatility on long-term interest rate spike, and to the upside that is again just simply an overall reflection of the uncertainty of the peril of their economy at this stage, and their inability to effectively pay off any debt that they may assume then we have April 2011, if we scroll up, and actually look to plot the point we have it around 13%. So, they’ll just be above here again it’s going to plot high from our Irish debt at that point, and then April 2012 27% which is an astronomical figure, and I’d like to detail that just to you in terms of what it means for the financial markets, and in terms of potentially loaning, are looking to borrow from the Greek economy 27% we have April 2012 mother’s up here, and again we’ll just put it at the top of our chart what that means effectively is, if you were to assume some finance from Greece, and effectively purchased, and other time hypothetically one of their 10-year bonds they would effectively be paying an interest rate on the bond of 27 percent which is an astronomical figure in terms of generally pricing a bond, and obviously paying an interest over a long period of time with 27 percent it’s absolutely huge. So, I just show you the level of risk or uncertainty the financial markets have priced in when understanding that the level of peril the Greek economy was actually in at this time. So, all of these fundamental cases served actually to help us, as traders, not only for the knowledge they served to really give us an idea of the overall economic environment within which we trade it is the job of the financial trader to speculate on the movement of price these prices relate to many different assets but also a very common relationship to the performance of the global on domestic economy from which they, are natured become not therefore effectively do our job, if we do not have a fundamental grasp on how economic events can shape the very environment we ourselves conduct business in once we better understand, and the effects of news, and economic activity we will become more knowledgeable about our trading conditions, and therefore more assured in our trading decisions. So, that brings us to the end of our real case studies fundamental analysis webinar, let’s go over a quick review of what we learned through the webinar trading an economic environment why it is. So, important to understand, and, and grasp the overall economy, and how it changes the risk-on risk-off approach to your trading, and really hard facts all of these different assets that we trade, as financial traders, we then went through different case studies over the last 15 years we have Brexit the Swiss National Bank removing the currency paid to the Euro Lehman Brothers, and effectively a lot of detailed discussion on the financial crisis of 2008 that let us effectively into discussing the recovery mechanism of quantitative easing, and then we touched upon the European sovereign-debt crisis how that may affect liquidity, and how it certainly affected the bond markets, and perceptions of risk for domestic economies, and potentially the eurozone a growth perspective overall. So, all that is left for me to do is thank you very much for joining us on this instalment of courses on demand, and brought to you before I start economy we do hope to see you very soon bye for now!

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By Keiran

Forex trader, media, marketing, entrepreneur and father

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