Updated: Sep 21, 2020
For investors who are accustomed with the securities market and are keen to explore derivatives, the futures market is somewhat very different but exciting. Price drivers for future contracts of financial instruments are introduced.
For stocks, the publicly-listed businesses are typically screened using accounting ratios obtained from company financial information to check for financial health in terms of profitability, cash flows and assets vs debt. The intrinsic value of the stock is then determined with future growth potentials.
In the futures market, however, analysis will look at economic variables and other factors that could impact supply and demand of the asset. Fundamental macroeconomic factors are high level variables influenced by the economy, which can lead to price movement of a financial futures contract. Examples of these factors are Gross Domestic Product (GDP), interest rates, inflation, employment and trade surpluses/deficits. These can create upward and downward pressure on prices of the futures contracts. For e.g. If the US Central Bank (Federal Reserve) decides to hike domestic interest rates and there is no corresponding news from the European Central Bank (ECB), then the EUR/USD futures contract should decrease in price as U.S. dollar has strengthened in relation to the Euro. At the same time, however, if the US runs a trade deficit with the EU which offsets the gains made by the Fed’s interest rate increase, then the US dollar might decrease in value in relation to the Euro, leading to an increase in EUR/USD futures contract price.
The investor also needs to pay attention to interactions of these securities or financial instruments with other interconnected markets and with the broad economy, Economic, financial and trade data are released at regular intervals and can have a dramatic effect on prices in financial instruments. Investors need to be aware of economic release dates and related market impact, as not all data will have the same impact. All futures contracts will have economic releases and news announcement: for e.g. central bank news or trade negotiation news between countries, that is specific to the security or instrument.
Trading in the futures market can be viewed as more transparent than trading in individual stocks, as most macroeconomic information driving prices of futures are public and are readily available. The value of stocks, can be driven by individual company information, which not all are made public. Audited financial statements from companies, which by law need to be public every quarter, can also be inaccurate.
In contrast to fundamentals, technical analysis track chart patterns created by price to estimate market movements. In the short term, investors review visual representations of price such as candlesticks and indicators to illustrate past and present prices, in order to predict future price trends. Many investors and traders combine both fundamental and technical evaluations by using fundamentals to screen the opportunities, then using technicals to enter and exit the transactions.
In summary, the global economy, trade and financial markets are interconnected, investors will need to look at multiple markets to have a global view of what they are investing.