Using Politics for Profits

Political events all over the world influence asset prices, both short and long term. And right now, the biggest political event is what’s going on in Scotland and their failed bid for independence from Great Britain. The secession was shot down, and this had an immediately positive impact upon markets in London, but it also brought up some new concerns. One of these is the fear of a “Great Stagnation,” an economy where growth is nonexistent for a while.

Trade with the Politics in MindRecently, the G20 announced that they were considering adding a $2 trillion global stimulus to the world’s economy, which would create millions of new jobs all throughout the world, but as of right now, this is just talk. Furthermore, it underlines that something negative is going on below all the positive news that major economies are experiencing. It seems to say that the growth that’s currently going on will not be sustained for long, and that something needs to be done to prevent an economic slowdown. Europe is a leading example of this so called stagnation. There economy has remained pretty ho-hum for months, and there doesn’t seem to be an end in sight. A lot of emerging markets are also in the same boat.

There are two ways that this can go. Either Europe (and other struggling areas), will revive from such a stimulus package, or their bogged down economy will affect nations that are not currently struggling, such as the United States.

Internal politics aside, there’s opportunity within the sideways looking market. The good thing about an asset that hasn’t seen much movement up or down lately is that future movement becomes easier to predict, especially when it is news related. A basic understanding of investment psychology goes a long way here. For example, the Fed is expected to end its bond buying stimulus next month, which means that one source of easy money is about to come to an end. This probably won’t have a huge impact since other avenues for funding will still be easily available, but the immediate impact will drive down prices. Short term down trades, such as with put binary options, will see big profits here if timed right within the stagnant markets. Remember, something like this will not have a long last impact, so short term is the key, such as using 30 minute timeframes.

While looking at political events, you cannot forget to mention Russia. Russia is certainly feeling the pressure of the sanctions that they’ve had handed to them over the Ukraine crisis. Their economy was doing relatively okay compared to what’s happened over the last few months. Sanctions, even when nominal, have a negative impact upon consumer confidence and drive prices down.

As you can see, you really don’t need an advanced amount of knowledge to analyze major political events from a financial perspective. Bad news drives prices down, good news brings them up. The only trick is to look at an event and figure out which assets will be most heavily affected by that event. In the case of Scotland, it affects mostly the domestic English/Scottish stocks, as well as the Great Britain pound sterling. These things received a temporary boost because of the news of continuity. The opposite would have probably been true if a secession occurred. Prices would have been driven down until a new sense of normalcy was attained. Russia is another easy thing to look at. Economic sanction drive domestic assets and currency value down. When the sanctions are repealed, prices will go up quickly on some level, depending upon the position that Russia puts itself in in the meantime.