f you’re trading online, it’s crucial that you understand how the global economy works. This will give you the knowledge and expertise to interpret economic data. You can then apply this knowledge when making trading decisions. For example, when the US markets fall, there is a probability that Asian and European markets will fall as well. This article will give you a brief guide on how the economy works, which you can use to help your trading.
Commodities: the starting point
Commodities are divided into categories: agricultural commodities, energy commodities, metals, livestock and meat. Commodities are the backbone of the global economy. For example, energy commodities like oil provide power for transportation and other industries. Natural gas and coal provide people with energy. Agricultural commodities sustain the global population.
After being produced, the commodities are supplied to local and international markets. For example, after being extracted, oil is refined and then transported to countries that don’t produce it. The oil-exporting countries get foreign exchange and revenue from the oil that they sell. On the other hand, since these countries don’t have large agricultural land, such as the small oil producing countries in the Middle East, they import food from other countries.
After the commodities are extracted, they are usually processed. For example, cocoa is processed to become chocolate, crude oil is refined to become gasoline and diesel, and wheat is processed to become wheat flour. Labour, funding, and machinery are required for processing. For this reason, countries that can perform manufacturing on a large scale such as China and Mexico usually dominate this industry.
Producing and manufacturing commodities requires money. For small scale producers, they might source this money from the retained profits of their business, or other internal finance sources. However, at a larger scale, more funding is required, which is often lent by banks. These banks receive deposits from customers and then lend the money to others, with an interest rate. The base lending rate is usually set by central banks such as the Federal Reserve and the European Central Bank. The rate usually depends on the inflation and the economic well-being of a country. If the economy is doing well and inflation is rising, the central bank might interest rates to avoid a hard landing. A hard landing is a situation where an economy falls after a large rally.
What to Watch Out For
You should look out for the following points when interpreting economic data. First, consider inflation. A high rate of inflation usually leads to higher interest rates, as the central banks try to mitigate the situation. Inflation is usually measured by Consumer Price Index, retail sales, consumer confidence, and Purchase Price Index.
Second, look at the employment sector. Ideally, a country that is doing well should have a low unemployment rate, a high participation rate, strong wages, and low vacancies. It should also have more people being employed in a given month.
Third, look at numbers in reports for manufacturing and industrial production. Countries like China and Germany are known for their large manufacturing and industrial bases. Follow these reports and learn how to interpret them. If numbers are falling, it is a sign that the economies are not doing well.
Fourth, consider trade data that is published by countries, which includes the imports and exports. A healthy economy is one where the imports and exports are increasing. When exports are more than the imports, it usually leads to a surplus, which is usually better than a deficit.
You should also focus on information from key financial institutions such as the World Bank, International Monetary Fund, and central banks. You can use an economic calendar to know when key information will be released, which will help you access it quickly and prepare your trading to take advantage of any reactions in the markets.
As a trader, having a good understanding about how the economy works and how to interpret the economic data will help you make better decisions. For example, if wages of a country rise, it will help you know whether the currency will move up or down. One you’re familiar with global markets, online broker Easy Markets is a potential option when looking for a range of assets that you can trade online.