Factors Affecting Financial Markets

Efficient transfer of resources from those having surplus resources to others who are deficient is achieved through financial markets. The financial market aims to set prices for global trade, raise capital and transfer liquidity and risk. The financial markets have two major components: money market and capital market.

1.3.2 The Money market refers to the market where short term funds are exchanged between borrowers and lenders to resolve their liquidity needs. The money market instruments are treasury bills, commercial paper, bankers ' acceptances, deposits, commercial papers, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage and asset-backed securities.

1.3.3 The Capital market deals

Factors affecting financial markets are:-

• Global environment plays an important role by serving as channel for flow of capital from rich to poor countries. As financial globalisation is gathering pace, markets are evolving to become more co-integrated and efficient. Thus any surprising economic news like unanticipated supply shocks owing to political events or natural disasters in oil producing areas of the world, war on terrorism and other events have an impact across the globe. The global environment presently is affected by uncertainties of Chinese market, Greece economic crisis, Oil supply issues and ISIS threat.

• Domestic fiscal and monetary policies play a vital role in shaping the financial markets. Fiscal policy serves as a direct tool to stimulate or dampen the economy wherein fiscal deficit, tax rate changes and increase or decrease in public spending are important factors watched by markets. Monetary policy is ensures adequate liquidity in the economy. Lowering short-term interest rates stimulates investments but has risk of higher money supply leading to rise in inflation. Hence, balancing act between stimulating the economy in the short run and containing inflation in the long run is needed. Adverse political situations and the steps taken by regulatory mechanism (Penalties, Taxation), economic strength of a nation (GDP, Current Account Deficit and Growth Rate) also affect

The good news can really cause a bump in prices, but it seems like these days that bad news captures most of the headlines and affecting prices. As the financial markets are involved in facilitating buying and selling of financial securities or assets, its prices are affected by uncertain events and volatility. The popular indicators of financial markets are: -

• Stock Market Indices: - The most common indicator watched by everyone is the movement of stock market indices. The indices represent aggregate prices of publicly traded companies. The stock prices are indicative of expected future earnings and thus a true indicator of state of macro-economic environment. In the Indian context Nifty50 of National Stock Exchange and Sensex of Bombay Stock Exchange are the most commonly watched indices.

• Commodity Prices: - Various commodities (Agricultural, Metals and Energy) are traded on commodity exchanges. Any change in supply- demand equilibrium has an effect on the prices of particular commodity. Accordingly future prices are affected by spot price, storage costs and interest related costs. Most commonly traded commodities are Gold, Silver and