What role do Fundamentals play in today’s markets?

 

Fundamental analysis is often considered to be a “top down” approach to investing.  Specifically, look at what is going on in the economy or in the news, and then base your investment decisions around that.

Personally, I have always enjoyed the study of fundamentals and their impact on the trading environment.  Being an avid news reader and with an interest in current affairs, it does not feel like work – more simply personal interest.  There in itself is an important message – find your niche – the area of the market that you enjoy.

However, technical analysis is just as crucial a component for trading success too.  If you like, one crude way of looking at them is that fundamentals tell you the why (try explaining the chart of 9/11 using technicals) while technicals tell you the when – the timing and levels of your trades.

Over the past couple of weeks we have had events of the most gigantic proportion taking place in the world’s economy, that are now barely getting a headline – such is the market’s appetite for a new story.  The key areas we shall look at are the US Election, Europe and the Middle East.

US Economy

As PT Barnum, the famous circus promoter would say – “Ladies and Gentlemen, the biggest show on earth….”  the US election is now old news.  However, the market is still digesting the new or not so new scenario in the US.  With the US economy on the brink of what has been referred to as a Fiscal Cliff, my contacts on Wall Street tell me they are less concerned.  A Fiscal slope is what the inside line is suggesting for the moment.  A meeting of the minds between the Democrats and Republicans on policy is reported to be already in the bag – verbally, with it to be confirmed in the early half of next year.

Perhaps some more middle of the road politics and more importantly a focus beyond party agendas to reality of the US economy is finally on the cards.  For the Obama administration, support in the house, following the difficulty of getting the Healthcare reforms through, is essential if major structural economic reform is to become a reality.

For the Republicans, this bipartisanism is likely to be the only say they will have, while they remain in an unelectable format.  The absence of the Hispanic and Afro-American vote must surely be of a great concern to the Party, which proved to be a major issue for them.

Europe’s Economy

The woes of Europe remain a major shadow over the global economy.  Clearly the issues in Greece have spread to some of the other nations, and most notably Spain.  A not so united Europe is proving a difficult ship to steer.  The cultural and value differences have never been more clear, with the conscientious North, expected to bail out their hedonistic Southern cousins causing great tension.

In particular, for German Chancellor, Angella Merkel, who herself is entering an election year, will have some difficult choices to make.  One option is she steps up with further commitments to bail out Greece, where the austerity measures are being slowly and grudgingly implemented, at the expense of alienating her countrymen/voters at home.  Alternatively, does she say no, and put Germany’s interests first, with Greece and potentially the broader Eurozone the casualty.  A tricky decision and one which will have massive opportunities for traders, particularly in the FX markets.  Who would want to be in politics!