(Finance) Financial markets: why do they move in the way that they do?

Tip: Here’s a news story that is guaranteed to generate a lot of interesting discussion among students who work in the financial markets.



It was announced that China’s GDP rose 9.8% in the fourth quarter compared to a year earlier, exceeding forecasts. So what do you think happened to China’s main stock market, the Shanghai Composite index? It fell 2.9%.

It’s a particularly good example of how difficult it is to predict (and trade) the financial markets. The reason in this case – given in the article – is that strong GDP will increase the chance of a rise in interest rates, and this rise in borrowing costs will cool economic growth going forward. Rising consumer prices, reported at the same time as the GDP figures, will also cause a rise in the yuan to fight imported inflation, and this is bad news for China’s export-oriented economy.

So there is a reason for the dramatic fall in the markets, even though at first sight the market’s reaction to the news seems completely irrational. Students who work in the financial markets will love discussing this, and will give many other reasons for why markets move. During the whole course you could occasionally look at other large market movements in real time as they happen – the students themselves will know which markets are particularly interesting.

And here’s a hint to get your financial markets students talking about something really interesting: for any large market movement that you are following, ask them to discuss the interplay of a) fundamentals, b) liquidity, c) market psychology, and d) technical analysis.

Article pasted below, in case it eventually disappears:

MarketWatch. Jan. 20, 2011.

Asian stocks skid on strong Chinese data

HONG KONG — Asian markets came under renewed selling pressure Thursday, led by Shanghai and Hong Kong stocks, after Chinese data underscored Beijing’s need to tighten monetary policy to rein in price pressures.

The data weighed on regional shares on a day when financial stocks were already weak in some markets after Wall Street retreated Wednesday, in the wake of disappointing earnings from big U.S. banks, including Goldman Sachs Group Inc.

The Shanghai Composite index tumbled 2.9%, Hong Kong’s Hang Seng index shed 1.7%, Japan’s Nikkei Stock Average and Australia’s S&P/ASX 200 each dropped 1.1% and South Korea’s Kospi declined 0.4%.

China’s gross domestic product rose 9.8% in the fourth quarter from a year earlier, exceeding forecasts for 9.2% growth in a Dow Jones Newswires poll, as well as the third quarter’s 9.6% expansion.

The nation’s consumer-price index rose 4.6% in December, below an expected 4.7% rise, and slowing from November’s 5.1% rise.

But several economists highlighted the need for more policy tightening — including the case for an imminent interest-rate increase — to check consumer prices and cool economic growth.

“The data doesn’t change our predictions that Beijing will continue to tighten as prices are still rising on month,” said BNP Paribas economist Isaac Meng. “There’s a lot of liquidity in the system and price pressure is building up.”

Citigroup economists said that with inflationary expectations likely remaining high, interest rates were also likely to stay at elevated levels, adding that China could allow the yuan to appreciate at a faster rate to “fend off imported inflation.”