Trade Talk and Tweets: the New Fundamentals

Posted on Friday, May 24, 2019 at 12:13 PM

Fundamental data are also known as event risk. Professional traders keep a close eye on the economic calendar for events or reports that could alter a trend or start a new one. A treasury trader might hedge a long position by buying 10-year note puts or selling calls just before employment or inflation reports. Many stock market traders use options for protection just before earnings reports. Farmers frequently use futures as insurance before supply and demand data are released (WASDE). These are all examples of regularly scheduled events. Economists and their teams work diligently gathering statistics to calculate a consensus estimate for each piece of fundamental news.

Long before a scheduled report is released a consensus number has already been priced in. It means, if the report is near expectations, the news should have little or no impact on the markets. Bullish and bearish reports are already widely known. It is the difference between actual and consensus data that make markets move. For example, if an inflation figure was much higher than expected, treasury futures would likely drop steeply. When treasury futures go down, interest rates rise. The Fed raises interest rates to stem inflation. A rise in interest rates makes the dollar more attractive and a stronger dollar means investors will likely buy dollar assets, like stocks. Do you see how one report that is out of line with expectations can start a chain reaction that ripples through the financial sectors, commodities and ETFs?

Now let’s talk about the new fundamental data. The last three Sunday nights have seen some volatile moves in equities. For stocks, three consecutive Fridays saw solid price action and finished near the weekly highs. Then by Sunday night or early Monday morning stocks have taken big hits to open acutely lower each Monday. So what has changed? Trade talk and tweets have become the new fundamental data. Currently, markets are far more sensitive to unplanned negotiations or tweets. The point of all this is to stress how important it is to be properly hedged for the weekends, now more than ever.

Tensions with China and Iran seem to escalate every weekend. So, if there are no unpleasant words exchanged this weekend, the indexes might start this week with a bid for the first time in May.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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