Trading Market Cycles
Overview
Trading market cycles means using an understaning of the
business cycles
in an economy and their impact on assets to optimally
choose an asset mix.
Four Primary Markets
There are four primary markets that form the core of macro trading strategies.
Market Cycles
Global macro strategies often rely on the cyclical nature of markets to drive their allocation strategy.
Market cycles are driven by the economic phenomenon of
business cycles.
That is, macro economies have been observed to go through periodic cycles of boom and bust.
At the beginning of the cycle, interest rates begin to decline. (that is, bond prices move up)
This is due to a cooling off from the previous cycle, and the central bank often lowering rates to
encourage growth. Soon, the decling rates begin to ripple through the economy which causes demand to
go and businesses start to produce more. The increased activity starts to push equities higher.
As demand continues to grow, commodity prices begin to be pressured from increased demand, which causes
commodity prices to increase.
Once the market begins to overheat, the central bank begins to raise rates, which causes bond prices to
turn down. Eventually, equity traders begin to discount a downturn and equity prices begin to turn.
Commodity prices remain high as demand remains high. Once the increased interest rates ripple through
the economy, demand finally begins to lag which causes commodity prices to decrease.
The description of market cycles presented paints a picture of three markets. Bond prices lead, followed by
equity prices, and lastly followed by commodity prices.
(see
Pring chap 2)
copy
Foreign Exchange
