Four sectors of the financial market


At the heart of relations, economic cycles

Thus, the relationship between commodities and bonds [2] added the relationship between bonds and stocks, in which the anticipatory role the bond market. But at the heart of these connections are economic cycles. Development and the fall of the economy are the basis to explain the relationship between bond markets, stocks and commodities.

The figure shows an idealized diagram of the interaction of three market sectors in a typical business cycle. Curve shows the development of the economy in periods of boom and bust. When the curve is above the horizontal line, but it goes down, this corresponds to a slowdown in economic development. If it falls below the horizontal line - the economy enters a phase of decline. The arrows indicate the direction of the three markets: commodities, bonds and stocks.

In this case, the full economic cycle can be divided into six stages. Each is characterized by a change in the trend of the three asset classes: bonds, stocks or commodities. From this sequence can be a valuable conclusion to allocate its assets should be based on the analysis stage of the economic cycle. But we must keep in mind that the dynamics of the bond markets, stocks and commodities are not always exactly the subject of this chronological sequence.

In practice, more complex, and in our case we can see a violation of this order: after long-term growth of the bond market expected growth of the stock market did not happen, but at the same time, there is a growth market for goods. This scheme is not always an accurate representation of what is happening in the markets, but she explains that it should happen, and what to expect next.

In the long term growth -

Determine the current state of the U.S. economy on the curve rate of its growth through the dynamics of the bond markets, stocks and commodities, we can draw the following conclusion. Now the economic cycle of the United States is in the third stage of development, which correspond to the simultaneous increase in bond prices, commodity prices and stocks. The fourth stage of the economic cycle will be characterized by the beginning of fall in prices of bonds. The growth stocks and rising commodity prices have good prospects.

In the next post, we will return to this scheme, analyzing the link exchange sector discussed three market sectors and gold, identify forward-looking direction of change dollar and gold on the current stage of the economic cycle. The construction of graphs used technical analysis package of CQG.


Part 3. U.S. Dollar

It is believed that the dynamics of the U.S. dollar is closely linked to the dynamics of bond and equity markets. Sometimes, analysts point out that the increase (decrease) the U.S. dollar was due to the growth (decline) in the stock market or bonds. In other cases suggest the contrary, that the dynamics of the stock market or bonds affected by the change in the dollar.

It takes time

Certainly, in the short term can be a direct correlation between the U.S. dollar and the debt and equity markets. The connection is apparent, for example, foreign investors buying dollars to purchase U.S. securities, or when you have to move investors from the U.S. currency in its national after selling shares or bonds. However, in the long term picture of the relationship with the U.S. stocks and bonds is more complex. There are periods of simultaneous growth (decline) in those markets, and there are periods of time (and quite long), when there is an inverse relationship between the dollar and securities.