Market Sentiment in Indices Trade

One of the factors which influence Indices movement is the prevailing market sentiments at any particular moment. The market sentiment is determined by a couple of things, among the common ones are:

Economic Outlook & Economic data reports
Monetary Policies - Such as Interest Rates & Inflation policies like Quantitative Easing

Short-Term Market Views from Economic Reports

Some of these factors & aspects will affect the shortterm market sentiment meaning they'll only cause some minor volatility in the market which will only take a couple of hours or day to fade out. These shortterm market sentiments are best utilized by trader to look for the best entry points for opening trade positions.

Take an economic report on the EU unemployment rate. It might show a rise of about 1%. In the short run, this could make the EURO STOXX index drop from the added volatility. Yet other EU economic reports point to growth in the Euro Zone. So the index should soon climb back up after the brief shake.

Most economic news reports spark short-term price swings. These swings may push the market one way briefly. But the big picture matters more: the economic outlook. For instance, if the EU zone shows strong growth ahead, EU indices will trend up overall, despite news-driven volatility.

Long-term Market Sentiment - Monetary Policy

Beyond the economic landscape overview of a specific nation, which serves as the primary driver dictating the long-term market sentiment for a given stock index, the monetary policy employed is the other crucial factor influencing that same long-term market sentiment for the particular stock index.

Monetary policy is comprised of two primary components: control over Interest Rates and management of Inflation.

These two components determine the economic expansion prospects for a country.

Interest Rates

Interest Rates are instrumental in dictating the quantity of accessible credit available to entities for conducting business, as well as the associated cost of obtaining that credit. Nations maintaining an interest rate of 1% signal that borrowing capital is very inexpensive, generally encouraging individuals to take on larger loans because the cost is low: this consequently enables them to undertake more substantial business activities due to increased available capital. Conversely, if a nation's interest rate stands at 10%, it implies that credit is not easily obtainable for commercial use, resulting in businesses operating with diminished capital resources.

Countries with low interest rates often experience positive market sentiment in indices trading. A low interest rate policy supports economic growth, encouraging investors to take positive positions.

When a country keeps its interest rates low, people tend to feel positive about its economy in the long run. So, the market usually stays bullish for these countries.

A nation with robust economic growth and high-interest rate policies often fosters bullish market sentiment. However, interest rates are just one among many factors influencing broader market perceptions.

Inflation Policy

The monetary policy of any economy also will be formulated to control inflation. The ideal optimum inflation level is between 2% to 5%.

If a country's inflation rate falls below 2%, it risks entering deflation. During deflation, item prices drop to unsustainable levels, hindering economic growth and increasing the likelihood of an economic slowdown.

Between 2% and 5% - prices support growth without making goods too costly for buyers.

If the inflation rate exceeds 6%, it signals that asset prices are becoming excessively high and potentially unaffordable for the average consumer. As inflation continues to climb higher, goods and services become increasingly costly, leading to a measurable reduction in consumer purchasing power. This, in turn, results in insufficient sales volumes and lower profits for producers, as their merchandise is priced beyond the reach of prospective buyers. This scenario is detrimental to economic expansion and can actively cause an economic slowdown because the velocity at which goods circulate within the economy diminishes.

The art of controlling inflation is a delicate balancing act, too low and economic growth slows down, too high & economic growth also slows down, & this is why economies have to aim for the optimum inflation of between 2% & 5% to ensure the economic expansion of their economy is bullish.

This is the explanation why the longterm market sentiment will be determined by the inflation control policy.

As a stock trader, you might not always consider a country's monetary policies: however, these are key factors influencing the long-term market sentiment of various indices.

Visual demonstration of how monetary policy impacts long-term market sentiment.

One case of policy affecting markets is the Aussie dollar and Dow Jones. The index climbed from 10,000 to 18,000 points. The Fed's easy money plan and rate cuts drove it.

The quantitative easing policy is a form of monetary intervention intended to spur consumer spending while simultaneously elevating inflation rates towards optimal levels. When the FED initiated its Quantitative Easing (QE) policy, American Indices experienced an upward surge reflective of this market sentiment - a notable example is the Dow Jones index, which climbed from a level of 10,000 points to 18,000 points.

In 2015, the FED started to suggest shifts in monetary policy. They planned to raise interest rates. Market mood changed then. Indices paused their steady climb. The uptrend picked up again once the rate hike talk got delayed. Sentiment settled back. US monetary policy drove all these shifts in market moves.

Another example of how monetary policy can affect the market is the EU Quantitative Easing program that was launched in January 2015 after lowering the interest rates in the EURO ZONE. Because of this policy, the market's outlook for EU indices became more positive. From January to March, all European Indices rose significantly, and they were expected to keep going up even after the QE program started in March.

The EU Quantitative Easing plan runs through 2015 and 2016. It drives long-term trends for European indexes. That includes EURO STOXX, Germany DAX 30, France CAC 40, Italy FTSEMIB 40, Netherlands AEX 25, and Spain IBEX 25.

For example, the Germany DAX 30 increased by 22,000 Points between January 2015, when this QE plan was announced, and March 2015, when it started.

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