Why High Impact News Sometimes Doesn't Move The Market
There are a couple of very simple reasons why certain high impact news releases might not be important for the market, and this video explains why...
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We have a question from Thando, who asks why certain high impact news releases sometimes don’t move the market, and adds to his question how we can know what news or data points central banks are currently focused on.
Thanks for the question Thando, and the answer to this is actually much simpler than what you might think. There are a couple of very simple reasons why certain high impact news releases might not be important for the market.
Let’s look at a couple of the reasons why certain news events, which are considered as high impact news events, why they sometimes don’t really move the markets?
The very first reason actually comes down to the calendars themselves. You see, most of the economic calendars out there will classify certain economic news events as low, medium or high impact news events, and they of course do so because of the past reactions that those particular news events had on the market. Now, the one thing that you need to understand about economic calendars is that sometimes they can sometimes have a tendency to mark things that are not very important as high impact and vice versa can have a tendency to mark things that are very important as low impact.
And the biggest reason for that is because their models probably only look at past volatility of these events or past importance of these events, but just because a data point has sometimes moved the market or used to be very important does not mean that it will be important every single time that it’s released, there are plenty of other factors which might cause the market to completely overlook a high impact event and sometimes cause the market to over-react on a seemingly low impact event.
So, to simplify this, don’t expect big impact from red events or low impact from yellow events, the expected impact comes down to more than just past volatility.
Some of the other reasons why events might be overlooked by the markets is when the overarching themes in the market takes centre stage. A good and recent example was the coronavirus. With all the economies around the world coming to a complete shutdown, it meant that the market was going to see some crazy numbers, which meant that the impact one would usually expect from massive events like NFP or CPI just wasn’t important at that time.
Another thing to consider for potential market impact is monetary policy. Depending on where a central bank is in terms of their policy stance, certain data points will at times be lesser or more important, depending on where they are in their policy stance and more importantly where the market thinks they are going to go next.
So, again, good example of where we are right now, with the majority of major central banks around the world hitting the lower bound in rates and starting massive easy policy regimes, it has meant that certain points like CPI might just not be that market moving. If the market expects interest rates to stay at zero for a couple of years, and you’re inflation target is 2% and your current core inflation is sitting at 1%, the market might not really care about that one particular CPI print because it’s not expected to change the bank’s current policy stance or policy regime.
However, and this brings us to the third point, and that is that even though that’s the case, the expectations going into the event is also massively important. Because, if even if the central bank is in the current scenario like I just described, if there are concerns about deflation for example, like we have right now with the ECB, then suddenly inflation is important for the EUR and the ECB, but it might not be important for the FED in terms of immediate market reaction right now, if that makes sense.
The other thing to keep in mind, is of course the actual event itself. Even if something is very important and highly anticipated by the market, those type of events will already be priced into the market before they occur, which means that the biggest reactions from highly anticipated events are when they come in much worse or much better than the markets expected, otherwise it can create something like a buy the rumour sell the fact reaction or just an overall muted reaction if it comes out exactly as expected.
So, I hope that helps you with your question Thando, any other questions don’t hesitate to let us know.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a question from Thando, who asks why certain high impact news releases sometimes don’t move the market, and adds to his question how we can know what news or data points central banks are currently focused on.
Thanks for the question Thando, and the answer to this is actually much simpler than what you might think. There are a couple of very simple reasons why certain high impact news releases might not be important for the market.
Let’s look at a couple of the reasons why certain news events, which are considered as high impact news events, why they sometimes don’t really move the markets?
The very first reason actually comes down to the calendars themselves. You see, most of the economic calendars out there will classify certain economic news events as low, medium or high impact news events, and they of course do so because of the past reactions that those particular news events had on the market. Now, the one thing that you need to understand about economic calendars is that sometimes they can sometimes have a tendency to mark things that are not very important as high impact and vice versa can have a tendency to mark things that are very important as low impact.
And the biggest reason for that is because their models probably only look at past volatility of these events or past importance of these events, but just because a data point has sometimes moved the market or used to be very important does not mean that it will be important every single time that it’s released, there are plenty of other factors which might cause the market to completely overlook a high impact event and sometimes cause the market to over-react on a seemingly low impact event.
So, to simplify this, don’t expect big impact from red events or low impact from yellow events, the expected impact comes down to more than just past volatility.
Some of the other reasons why events might be overlooked by the markets is when the overarching themes in the market takes centre stage. A good and recent example was the coronavirus. With all the economies around the world coming to a complete shutdown, it meant that the market was going to see some crazy numbers, which meant that the impact one would usually expect from massive events like NFP or CPI just wasn’t important at that time.
Another thing to consider for potential market impact is monetary policy. Depending on where a central bank is in terms of their policy stance, certain data points will at times be lesser or more important, depending on where they are in their policy stance and more importantly where the market thinks they are going to go next.
So, again, good example of where we are right now, with the majority of major central banks around the world hitting the lower bound in rates and starting massive easy policy regimes, it has meant that certain points like CPI might just not be that market moving. If the market expects interest rates to stay at zero for a couple of years, and you’re inflation target is 2% and your current core inflation is sitting at 1%, the market might not really care about that one particular CPI print because it’s not expected to change the bank’s current policy stance or policy regime.
However, and this brings us to the third point, and that is that even though that’s the case, the expectations going into the event is also massively important. Because, if even if the central bank is in the current scenario like I just described, if there are concerns about deflation for example, like we have right now with the ECB, then suddenly inflation is important for the EUR and the ECB, but it might not be important for the FED in terms of immediate market reaction right now, if that makes sense.
The other thing to keep in mind, is of course the actual event itself. Even if something is very important and highly anticipated by the market, those type of events will already be priced into the market before they occur, which means that the biggest reactions from highly anticipated events are when they come in much worse or much better than the markets expected, otherwise it can create something like a buy the rumour sell the fact reaction or just an overall muted reaction if it comes out exactly as expected.
So, I hope that helps you with your question Thando, any other questions don’t hesitate to let us know.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
