Trading Journal
Intermarket Analysis
Intermarket analysisย is not a method that will give you specific buy orย sell signals. However, it does provide an excellent confirmation tool for trends and will warn of potentialย reversals. Bond prices and stocks are generally correlated to one another. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well. Once again, we will see a lag between bond prices falling and the resulting stock marketย decline.
> If Bond Price โผ, Interest Rateโฒ then Stockโผ
Bonds are safer than stocks but offer lower ย return. Stocks do well when economy is booming. Sometimes, both stocks and ย bonds can go up in value at the same time. This happens when there is too ย much liquidity, chasing too few investments. It happens at the top of the ย market. It could occur when some investors are too optimistic, and others are ย pessimistic. One of the best ways to beat inflation is to sell bonds and buy ย stocks when the economy is doing well. When the economy slows, consumers buy ย less, corporate profits fall, and stock prices decline. That's when investors ย prefer the regular interest payments guaranteed by bonds. There are also are ย times when stocks and bonds both fall. Thatโs when investors are in a panic ย and selling everything. Bond prices and stocks are generally correlated to ย one another. When bond prices begin to fall, stocks will eventually follow ย suit and head down as well. As borrowing becomes more expensive and the cost ย of doing business rises due to inflation, it is reasonable to assume that ย companies (stocks) will not do as well. During those times, Gold prices often ย rise.
> If Bond Price โฒ, Interest Rate โผ then Stock โฒ
Bonds are safer than stocks but offer lower ย return. Stocks do well when economy is booming. Sometimes, both stocks and ย bonds can go up in value at the same time. This happens when there is too ย much liquidity, chasing too few investments. It happens at the top of the ย market. It could occur when some investors are too optimistic, and others are ย pessimistic. One of the best ways to beat inflation is to sell bonds and buy ย stocks when the economy is doing well. When the economy slows, consumers buy ย less, corporate profits fall, and stock prices decline. That's when investors ย prefer the regular interest payments guaranteed by bonds. There are also are ย times when stocks and bonds both fall. Thatโs when investors are in a panic ย and selling everything. Bond prices and stocks are generally correlated to ย one another. When bond prices begin to fall, stocks will eventually follow suit ย and head down as well. As borrowing becomes more expensive and the cost of ย doing business rises due to inflation, it is reasonable to assume that ย companies (stocks) will not do as well. During those times, Gold prices often ย rise.
> If Bond Price โฒ then Local Currency โฒ
Higher returns on bonds attracts more investors ย โ makes local currency more attractive that that of any economies that is ย offer lower returns on itโs bonds.
> If USD โฒ then Commodities โผ
Conventional wisdom is that the US dollar ย has a strong influence on commodity prices. The explanation for this ย relationship is that since commodities are priced in dollar terms, then ย commodity prices must move lower when the dollar strengthens to reflect its ย increased purchasing power. This is a general rule and the correlation isn't ย perfect, but there's often a significant inverse relationship over time.
> If USD โผ then Commodities โฒ
When the ย value of the dollar drops, they have more buying power because it requires ย less of their currencies to purchase each dollar. Classic economics teaches ย that demand typically increases as prices drop.
> If Gold โฒ then USD โผ
During economic unrest, investors tend to ย dump USD in favour of gold. Gold maintains intrinsic value.
> If Gold โฒ then AUD/USD โฒ
Australia is the 3rd biggest gold producer ย (China, Australia and Russia), approx. $5bn. Gold has positive correlation ย (80%) with AUD/USD.
> If Gold โฒ then NZD/USD โฒ
One of the largest producers of gold (25th)
> If Gold โฒ then USD/CHF โผ
USD/CHF has a ย strong link with gold. More than 25% of Switzerlandโs money is backed by gold ย reserves. Gold has a negative correlation with USD/CHF.
> If Gold โฒ then USD/CAD โผ
5th largest producer of gold.
> If Gold โฒ then EUR/USD โฒ
Gold and Euro are considered anti-dollar. If ย gold goes up, EUR/USD goes up as well.
> If Oil โฒ then USD/CAD โผ
Top 5 oil producer in the world. Exports around ย 5.5 million barrels of oil a day to the US.
> If DOW โผ then Nikkei โผ
Performance of US economy is closely tied to Japan.
> If Nikkei โผ then USD/JPY โผ
Yen becomes a safe-haven during economic distress.
> Further Reading:
https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-809294 https://www.investopedia.com/articles/fundamental-analysis/09/intermarket-relations.asp#:~:text=As%20commodity%20prices%20rise%2C%20the,interest%20rates%20and%20bond%20prices.
https://www.thebalance.com/how-bonds-affect-the-stock-market-3305603#:~:text=Bonds%20affect%20the%20stock%20market%20by%20competing%20with%20stocks%20for,in%20value%2C%20bonds%20go%20down.&text=That's%20when%20investors%20prefer%20the%20regular%20interest%20payments%20guaranteed%20by%20bonds.
https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007
