Why is Macro driving the markets ?
The attached chart shows just how important macro analysis is on the financial markets, and just how much it can move prices.
It is important to understand that the markets are nothing more than a huge game of anticipation, which is why macro analysis is so important.
In particular, it is important to understand the phenomenon of pricing: the market incorporates all the information available to it into prices at a given moment. For example, if a new regulation is announced that will restrict the automotive sector in 2 years‘ time, the market will react immediately and shares will fall immediately, not in two years’ time, because the market will immediately take this information into account and pass it on.
This is where macro analysis comes in: it is used to construct and understand the market narrative. What are the current issues and constraints, what element could act as a catalyst for a further rise, what element is likely to lead to a fall, what is the market sensitive to, where is the focus?
It is by building this context that we can make the right trading decisions. Simply following a technical indicator will not be enough in the long term.
An indicator doesn't give you any real anticipation, any understanding of the movement in front of you, or any rationalisation of the levels to exploit (you avoid certain Supports/Resistances, for example, depending on the macro flow, because you know that it is too likely that you will break through these levels).
The whole market, all the assets, all the prices are simply a reflection of market expectations (pricing) on the outlook for the asset.
You've probably already heard that the markets are out of touch with reality, that they're too expensive, that fund managers are 🌰 idiots who buy overpriced stocks (this analysis is often based on the price/earnings ratio).
It's a misleading reading that doesn't look far enough ahead to provide a true understanding of the market...
The market never buys the asset at time T, it buys the asset's perspectives!
Let's take the GLT share at a given moment
Taking into account its current price and earnings, it is trading at a P/E of 26, which may seem expensive.
But if I look at the longer-term outlook :
Over a 3-year horizon, if the company achieves the results it expects to do, the P/E will actually be 14.97, a much more acceptable and bearable figure than the 26.04 we saw earlier.
That's what the market will pay! Not the share price at the moment, but its growth potential.
The market is counting on these expectations. If they deteriorate, this will lead to sell-offs, and vice versa.
And macro events drive the market because they can upset these expectations and market scenarios.
Many market players are looking to invest in what will yield the highest returns. Once again, macro is the key to finding what will yield the highest returns.
We know that certain companies/sectors react better to certain parts of the economic cycle, to a context of inflation, high growth, low growth, rising rates, an environment of long rates over an extended period, etc...
So when the macro outlook changes, or is disrupted by recent data, market players will review their positioning and seek to allocate to new assets that are likely to benefit most from the current/forecasted contex & environment.
What sectors are players pulling out of, what do they seem to be reallocating to? This is incredible information and a good barometer of the market's perception of its current macro environment and its appetite for risk.
And unsurprisingly, these flows only come into play when new macro/economic data upsets, downgrades or improves the outlook for certain assets, upsetting market expectations.
MANAGING means forecasting
TRADING: means anticipating
REACTING: means losing
If you want to do what great traders, fund managers and trading desk operators do, macro-reading is essential to understand your trading environment and what the market will be sensitive to.
Being a trader is not about reacting, because we need to limit surprises as much as possible through our macro reading, which is a prerequisite for anticipating and forecasting 😉
Ex options Market-Maker, Global macro trader with proven and certified trackrecord.
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