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What is Fundamental Market Analysis?

The premise behind fundamental analysis is that all assets should be priced appropriately. As a result, investors are continually asking themselves, “Does the price of this asset make sense?” The argument is simple: if something appears to be undervalued, investors should purchase it. If, on the other hand, some markets remain overpriced, it might be prudent to use the “sell” button.

The underlying circumstances are always shifting. If the firm reports better-than-anticipated earnings, for example, the stock price is likely to rise. Similarly, when a country’s economy is thriving and incoming economic data exceeds expectations, the stock market and currency of that country are predicted to increase. Worse-than-expected data from specific businesses or nations, on the other hand, should be viewed as a negative for asset values. Fundamental analysis may, of course, be applied to a variety of markets, not just equities. Fundamentals, in fact, have a huge influence on a variety of markets, including indices, commodities, and currencies.

Stock indexes and fundamentals

Stock indexes are influenced by macroeconomic factors, as well as the unique conditions of individual companies held inside certain indices. As a result, fundamental traders look at a variety of economic reports to see how the economy of a certain country is performing. Companies can make more profits while the economy is growing. The prognosis for businesses and the economy as a whole improves under this scenario, and stock markets are likely to increase.

Commodities and fundamentals

In the case of commodities, fundamental analysis is based on either growing or falling supply and demand levels. As a result, traders are continuously evaluating crucial information on worldwide demand for certain commodities, as well as reports on supply and stocks. Two simple formulae may be used to represent the key connection that determines commodity prices:

Demand exceeds supply, resulting in a price increase.

Price decreases due to a drop in demand and supply.

Weather, production strikes, technology, and government policy all have an impact on the supply of various commodities. In terms of oil markets, the OPEC cartel has an influence on supply as well. Aside from that, traders pay attention to stockpile data, which provides insight into demand levels. A higher-than-expected rise in inventory, for example, implies lower demand and might be considered bad for commodity prices.

It’s also worth noting that most commodities are priced in US dollars. When the dollar strengthens, commodities prices tend to fall. As a result, interest rates in the United States are crucial for commodity prices, when the dollar is projected to rise as interest rates rise.

Fundamentals and the Foreign Exchange Market

Various economic reports have an influence on the foreign exchange market. In general, there are two straightforward possibilities for how local currencies respond to economic data:

Strong retail sales, increasing inflation, and interest rate hikes are all positives for the currency.
Job losses, poor retail sales, decreasing inflation, and reduced interest rates are all negative factors for the currency.
The first scenario may be linked to a rising economy, which would lead to increased interest rates, which would be good for the currency.