Key Trends in the Equity and Fixed Income Markets

Main trends in the equity market and condition led to an increase in their values

A pattern is a pathway for the stock’s movement. The movement of the trends, either upward or downward, is according to the market scenario. The equity market trend is the process that analyzes present trends to forecast future trends. This analysis helps in predicting if the market sector, which is thriving and growing presently, would grow in the future or not. There are three main types of equity market trends, which include Short-term, intermediate-term, and long-term. A minor trend is the one which prevails for 6 days to 3 weeks and is easy to recognize due to its time frame (Hovav & D’Arcy, 2015). The intermediate trends are the reactions that stop the progress of price wherein each bear and bull market would have a minimum of three intermediate cycles. If you require assistance with economics dissertation help, understanding all these trends can be critical for your research. Each of the periods lasts for at least 4-8 weeks (Charles, 2018). Long term trends or primary trends are a broad up and down movement, which last for approximately 1 -4 years. The value of the equity increases till each of the successive rallies reaches the higher level before it, and when secondary reactions stop at a higher level than the primary trend is increased or up, which is called the BULL market (Pujari, 2013).

Present situation in equity markets and the dangers of stock investing

The European private equity market had reached to post-crisis higher on value and volume in the year 2018-19. The transaction value had climbed to 8.6% while capacity enhanced by 5.3% up. Such uplifts were driven by the buyouts wherein trends could be reviewed through European Constituents national markets. There are certain dangers to invest in the stock market, which include market risk, inflation risk, and liquidity risk. In market risk, investors might face losses because of factors that affect the performance of the financial market. The inflation risks are another danger which reveals that cash, which is flowing from investments, might not be worthy in the future (Charles, 2018). Lastly, liquidity risks come across when investments could not be bought more quickly to minimize loss.

Learning Outcomes 2 (LO2)

Different types of bonds

Corporate bonds are those bonds that are issued by more prominent companies to increase capital for those things, which includes market research, expansion, and development. When a company issues a bond, then it agrees to pay some amount of interest to its bondholders over a certain period and repay the principal investments as the specified period (Crash, 2015). As an investor, one can make money by a collection of interest payments for a specific period. On the other hand, municipal bonds are the one which is issued by localities to fund the projects of the public, which includes roadways, hospital systems, and schools. There are two types of municipal bonds, which include general obligation bonds and revenue Bonds (FAO, 2017). The general obligation bonds are utilized to fund the projects which don’t generate income, whereas Revenue bonds are supported by profit, which is designed to create. The government bond is the bond that is issued by the national government to fund government spending.

Various types of risks and their relationship with fixed income instruments

Businesses and investors make the application of derivatives to enhance or minimize the effects of four common types of threats, which include commodity risk, stock market risks, credit risk, and interest rate risks. Commodity risk is a risk of an increase in the commodity price when businesses purchase a commodity in the future (Investopedia, 2016). On the other hand, Stock market risk is the risk that is associated with the rapid fluctuation of the price of the stock market. Interest rate risk is the risk where the value of a bond or fixed-income investment would suffer because of the change in the rate of interest. Lastly, credit risk is the chance of a loss, which results from the failure of borrowers to repay the loan and meet the contractual responsibilities. It is found that corporate bondholder faces different types of risk, which include credit risk, interest rate risk, inflation risk, liquidity risk, and call risk. Investors can reduce such risks by expanding their assets (Investopedia, 2016). For instance, it was reviewed that Wal-Mart issued bonds had denominated in U.S. dollars on the German financial market, and even the French government had issued euro-dominated bonds on Japanese financial markets.

Learning Outcomes 3 (LO3)

ways to mitigate investments risk through financial derivatives

A financial derivative is a tool that is utilized by a company to manage the risk. It hedges the risks which are faced by the company. The primary function of financial derivatives is hedging and speculation (Shleifer, 2010). There are different types of derivatives that can be utilized for risk management and other investment risks.

Future Contracts-It is an agreement prevailing between two parties for the delivery and purchase of assets at the agreed price and date. The traders can make the use of futures contracts to manage the commodity risk or speculate the number of assets. The parties who are involved in this transaction are stated to fulfill their commitment to sell or buy the assets. This common derivative can be utilized to reduce the impact of the risk on the volatile prices of the commodity. The commodity futures contracts are being traded on controlled exchanges (Beattie, 2017).

Forward contracts-It is an agreement which doesn’t trade on an exchange. It is sold over the counter in between two parties who would modify the forward contract to meet the risks. When there is the creation of a forward contract, then the seller and customers might customize the size, terms, and process of settlement for derivatives (Bebusinessed, 2020). This contract is applicable over Counterparty risk, which is like credit risk wherein the buyer and seller might not be able to live upon the obligation prevailing in the contract.

Swaps-It is a derivative that is utilized to exchange one cash flow type from another and resolve the issues of interest rate risks (Shleifer, 2010). It is an agreement between two parties to transfer interest payments for a certain specified period (FAO, 2017). The swaps which are linked with defaults of mortgage bonds are highly popular derivatives type. Mortgage derivatives is a derivative based on investment securities which are developed to provide various risk and interest rate profiles from the mortgage.

Options Contract- It is a contract that is an alike future contract wherein it is an agreement prevailing in between two parties to buy or sell the assets at a specified price and future date. The option doesn’t oblige the buyer to exercise the agreements to purchase or sell. The option contract could be applied to enhance or decline the risk exposure of highly fluctuating stock market prices (Hovav & D’Arcy, 2015).

Learning Outcomes 4 (LO4)

Impact of regulation and technology on stock and fixed income market

Management and technology possess a more significant impact on the Fixed income market. The increase of electronic trading maintains algorithmic and higher-frequency trading in the fixed income future and cash bond markets. The present changes have led to the transformation of fixed income market structure, whereas it advances structural changes. The increased usage of electronic technology and automated trading in the Fixed income markets have assessed the ways electronification might affect market structure and quality (Johnston, 2020). The post-trade process is an essential part of the trade process, which permits the security’s sellers and buyers to evaluate trade details and make changes to the mistakes. Electronic trading is highly beneficial as it allows the transaction to be made expertly. Activities like increased collagenization, reporting of trade, automatic trade confirmation are some of the activities of technology used trading, which brings transparency and brings control over the process of business (Bahrami, 2015). During the time of the financial crisis, which was prevailing in the European Union’s market, trading regulations were directed in attaining a single market. However, post-financial crisis, the control possesses a reduction of systemic risks. In Europe, the regulators are giving focus on the enhancement of the management of derivatives, which impose strict liabilities on the banks for loss of client’s assets and extension of regulation in the financial market infrastructures (Fuhrmann, 2012). There are regulations like Dodd-Frank, Emir, and Mifid, which have influenced fixed-income trading. There is massive domination of the fixed income market by a financial institution and average trade size, which had worth millions of pounds for the bonds. Basel III is also a set of the regulation of international banking, which was developed by the bank for the global settlement to enhance stability in the international system of finance. It is used for the reduction of damages in the economy by banks, which sweeps away excess of the risks (Bahrami, 2015). This regulation was started from 2013 till 2015, which was further extended until 2022. This regulation permits the investors to give significant focus on individuals companies and stay away from economic backdrops. It will also increase banking regulation, which will be providing positive results for the bond market investors.

References

Bahrami, A., 2015. The impact of information and communication technology development on stock market expansion. MA thesis, university of Isfahan.

Charles A.Y., 2018. The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different? International Monetary Fund, IMF Working Paper, pp:1-31.

FAO, 2017. “Commodity Exchanges and Derivatives Markets: Evolution, Experience and Outlook in the Cereal Sector”. Report of the Committee on Commodity Problems.

Hovav, A. & D’Arcy, J., 2015. Capital Market Reaction To Defective IT Products: The Case Of Computer Viruses. Computers & Security, Vol. 24, pp: 409- 424.

Pujari, S., 2013. 9 Most Important Functions Of Stock Exchange/Secondary Market. [Online] Available

Shleifer, A., 2010. Inefficient Markets: An Introduction to Behavioral Finance. Journal of Institutional and Theoretical Economics JITE, Vol. No.158, No. 2, pp.369-374.

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