Fundamental analysis is crucial for investors and traders to understand the inherent value of various financial assets. In this guide, PXBT, an ambitious new broker launching in 2024, provides the basics of fundamental analysis, revealing what is driving the movements in financial markets.
Monetary policy
The monetary policies set by central banks around the world have a dramatic impact on fundamental analysis. There is an old adage coined by Marty Zweig — “Don’t fight the Fed” — that essentially suggests that market performance is directly affected by Federal Reserve policies. If the Fed or other central banks are raising interest rates, then Indices and other risk assets can struggle. Meanwhile, low interest rates can prompt more capital flow into risk assets.
Geopolitical events
Geopolitical events such as war, geopolitical and civil unrest, or terrorism can negatively influence financial markets. Investors and traders might avoid deploying capital during times of conflict or other political uncertainty. Geopolitical factors can also affect trade between certain countries, hindering economic stability.
Economic indicators
A variety of economic indicators can also cause volatility in financial markets. Rising unemployment can be a sign of an impending recession, for example, causing investors to take a more defensive approach to capital markets. Inflation, GDP, debt to income ratios, and more are also considered before taking positions in financial markets.
Trade flows
The rate at which countries are importing or exporting goods can potentially positively or adversely impact financial markets. Healthy trade flows lead to increased investor confidence and specific sector growth. However, tariffs and sanctions can lead to depressed growth and a decrease in investor confidence.
Corporate earnings
For individual stocks, reviewing corporate earnings is a must for thorough fundamental analysis. Investors and traders can read balance sheets and financial statements and get an understanding of important ratios like price to earnings, debt to earnings, earnings per share, or return on equity. Understanding which companies are listed within each region’s stock Indices can assist in assessing broader performance potential.
Sector performance
Industry trends can bolster sector performance to some degree. For example, the recent proliferation of AI models has led to increased strength and overperformance in the tech sector. As a result, the Nasdaq 100 has outperformed the Dow Jones Industrial Average. Capital also rotates in and out of sectors depending on the overall economic cycle.
Supply and demand
The supply of and demand for a Commodity can directly influence price volatility. Commodities have a fixed supply which ebbs and flows based on demand. If demand for Oil is low, production can be slowed, for example. Prices are often depressed when there is low demand, yet prices increase when demand is strong and overwhelmed the available supply.
Weather
The supply and demand of Commodities can be impacted by weather conditions. Oil, necessary for heating, can increase in usage and demand during cold winter months. Rainy or drought conditions can cause certain crops to flourish or die out, which can increase or lower supply of certain Commodities like Soy, Corn, or Coffee.
Conclusion
A large variety of factors can cause significant shifts in sentiment and/or supply versus demand. Fundamental analysis seeks to quantify or qualify economic, geopolitical, and even weather data in order to understand an asset’s perceived fair value.
At PXBT, an upcoming Forex and CFD broker, traders can speculate on global markets like FX currencies, Indices, and Commodities with some of the lowest fees and tightest spreads. Built on the industry-best MT5 system and promising a proprietary trading engine later this year, PXBT’s platform will be easy to use and understand for beginners, yet powerful enough for professionals that desire a robust experience. With focus on tailoring services to rapidly emerging markets like Latin America and Southeast Asia, and a commitment to regulation and compliance, PXBT strives to become the number-one choice for the new generation of traders.
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