Effects of macroeconomic news on world markets

currencies.
It was confirmed that macro-economic news generally have a statistically significant correlation with intra-day trading movements of the US dollar, with “bad news” for example, data indicating weaker than expected growth have a larger impact than good news.
Activity indicators like the GDP and the labour market data have particularly large and significant effect, with the news impact increasing during times of higher market uncertainty.
My focus this week will be on gold as a commodity, what happens when information from the US filters through to other markets.
That information is very crucial and the little information available to customers is expensive.
Financial customers typically purchase real-time information and hire professional traders who know how to interpret it.
Information about market conditions is not the only potential source of financial customers’ market power.
It can be information about interest rates, inflation figures or even job figures that has an effect on the markets.
A macro-economic announcement on commodity prices is lower than that of the US Treasury bonds, exchange rates and equity markets.
However, a number of US indicators, including inflation, GDP and employment statistics, repeatedly show the ability to move some commodity prices, in general, energy products have tended to be less sensitive, while gold has been highly sensitive.
For example, gold prices tend to rise if US inflation and output unexpectedly increase or if labour market tightens by more than the market projects.
For example the US job figures for the month of May rose to 9,2 percent, prompting a rally in commodities such as gold.
Gold also appears sensitive to information or news related to supply and demand.
In particular, some studies indicate that central bank announcements regarding sales of gold reserves have tended to cause price declines.
Any announcements about the US macroeconomic developments have shown to have the greatest influence on variables such as the US dollar.
However, we also need to include the ECB, Bank of England and BIS interest rate decisions and Germany IFO business climate survey.
The IFO indicator is the only time euro indicator shown to influence the US dollar-euro exchange rate.
Commodities are traded globally and news from emerging markets, particularly China given the growth in its demand across a wide range of products, may also influence a price change.
For now, the number of observations available to assess the impact of the Chinese macro-economic announcements is limited.
News can exert indirect influence through the commodity’s role as an effective hedge against lower interest rates or a depreciating US dollar.
In other words, the sensitivity to announcements merely reflects a relationship between the commodity and other financial assets, rather than announcements themselves?
We also need to include the US dollar exchange rate in this analysis, as there is strong evidence that commodity prices have been sensitive to the US dollar over a long period.
Many commodity prices are correlated to asset prices but our focus is the US dollar due to significantly inverse relationship between the two variables over a long period of time.
Indeed, commodities are often viewed as the hedge against the US dollar depreciation against major currencies with large financial market-related turnover such as the yen, euro and the pound sterling.
We also find that euro area indicators point to stronger activity or higher interest rates tend to increase gold prices and depreciate the US dollar providing further evidence of the gold’s dollar hedging characteristics.
Statistics have shown that gold price is pro-cyclical, i.e. it rises when US inflation increase or when activity indicators have strengthened by more than the consensus has anticipated.
In the modern era gold prices have shown two features, that in the short-term sensitivity is higher to market expectations for real interest rates and gold is seen as safe haven during “bad times”.
During the recent global financial crisis and the just announced eurozone debt crisis, gold prices have jumped from as little as US$1 200/oz to US$1 500/ounce, which prices fluctuate.
When other commodities have slumped in prices due to lack of demand gold has shown its prowess and given investors that much needed investment boost during these bad times.
In terms of currencies, the US dollar has been fluctuating against the six major currencies with the euro still a cause of concern with austerity measures being taken to resuscitate the eurozone from major disaster and being considered as contagious to other markets.
With the current situation in Europe and with the ECB set to hike rates in July for the second time in 2011, this will favour gold.
We also find that euro area indicators that point to stronger activity or interest rates tend to increase the gold price and depreciate the US dollar, providing further evidence of gold’s dollar hedging characteristics.
Even crude oil has been seen to react to some announcements as well. As we have also seen in recent times when the ECB unexpectedly cuts (hikes) its benchmark policy interest rates, the US dollar will tend to appreciate (depreciate).
As we have noted are few commodities that react indifferently to the good-bad news, with one exception being gold which responds positively to bad news.
This is consistent with the view that gold is a safe haven and in this case it experiences greater volatility during periods in which economic or financial conditions deteriorate. My conclusion is that commodities are not just financial assets and gold is not just another commodity.
Commodities tend to be less sensitive than financial assets for example crude oil, the most actively traded commodity futures contract, shows no significant responsiveness to almost all announcements.
However, as commodity markets have financialised in recent years, so their sensitivity appears to have risen somewhat to both macro-economic news and surprise interest changes.
The gold price is sensitive to number of scheduled US and Euro economic announcements including retail sales and inflation.
Since gold is regarded as a store of value and unique role as a safe haven, it has shown particularly high sensitivity to negative surprises that might lead financial investors to become more risk averse.
To reduce the uncertainty of the return on gold transactions, traders may wish to time their order flow so as to avoid the release of information that has been shown to affect prices.
Looking forward, one key issue will be the extent to which increasing financialisation heightens the sensitivity of commodities to macro-economic developments.
l For more information on markets and comments please contact Prodigy Chinanga, a forex strategist, on 0772753594 or email on [email protected]