The nature of price movement on the financial market

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Why are Natural Gas Prices Falling Today?

  • The market expected another small withdrawal of 6 bcf
  • Natural gas moves back towards the low
  • The deflationary spiral continues, but it is a bumpy road

It is now April 2, and the time of the year for a transition from withdrawals to injections into storage in the natural gas market. In 2020, the final withdrawal was during the week ending on March 22. In 2020, the withdrawal season ended late, with the last coming during the week ending on April 20. In 2020, they finished on March 24, and in 2020 on around March 25.

On Thursday, April 2, the Energy Information Administration released its inventory report for the week that ended on March 27. Meanwhile, the price of the energy commodity slipped back below the $1.60 per MMBtu level before the stockpile report.

The United States Natural Gas Fund (UNG) is the ETF product that moves higher and lower with the price of the energy commodity.

The market expected another small withdrawal of 6 bcf

According to the Estimize website, the consensus for the March 27 data from the EIA was for a minor six billion cubic feet decline in stockpiles.

As the chart highlights, the EIA reported that inventories declined by 19 billion cubic feet in the latest report pushing the total stocks below the two trillion cubic feet level to 1.986 tcf in the final report for March. Even though the withdrawal season did not end, stockpiles were 76.8% above last year’s level and 17.2% above the five-year average for the end of this year.

The ten-minute chart shows that the market’s reaction to the latest inventory data pushed the price of nearby May natural gas futures to a low of $1.521 before recovering. The energy commodity came within two ticks of the most recent low.

Natural gas moves back towards the low

The highest levels of inventories in years and the overall price carnage in the energy sector has the price of natural gas sitting not far above the recent low on the continuous contract. On the active month May futures contract, natural gas fell to a lower low.

The daily chart of May futures shows that at $1.521 on April 2, the energy commodity put in a new and lower low.

The weekly chart shows that the continuous contract avoided a new low by only $0.002 on April 2. Price momentum and relative strength indicators were in oversold territory with the May futures at the $1.55 per MMBtu level. Open interest declined from 1.451 million contracts in late February to 1.24 million as of April 1. The decline in open interest is both seasonal and reflects that many market participants have moved to the sidelines, given volatile trading conditions these days. Weekly historical volatility at 51.22% is close to the highest level of 2020. Each rally since in the natural gas market since November 2020 has attracted selling, and that trend continues.

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The deflationary spiral continues, but it is a bumpy road

Natural gas was moving lower long before the deflationary spiral caused by the spread of Coronavirus began. With businesses around the world closed down, people remaining at home, and the weather in the northern hemisphere entering spring, demand for natural gas is falling.

When it comes to supplies, many oil and gas companies are on the verge of bankruptcy. A decline in production over the coming months is on the horizon. The trend in almost all asset classes remains lower, and fear and uncertainty are at peaks. Over the past two weeks, ten million people in the US filed for first-time unemployment benefits. As the number of cases and fatalities rises, we will continue to see pressure on all markets, and natural gas may not be an exception. However, periods of hope will emerge, and there is a light at the end of the current dark tunnel. Expect lots of volatility in the natural gas market. We could see the price probe below the $1.50 level to a new low, but each new low has given way to a recovery rally that has ultimately failed. The rally that holds will need to come from a decrease in output over the coming weeks and months.

A continuation of the withdrawal season into April is not bearish for the price of natural gas. The high level of inventories and demand destruction is not at all bullish.

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The United States Natural Gas Fund L.P. (UNG) was trading at $11.86 per share on Thursday afternoon, down $0.15 (-1.25%). Year-to-date, UNG has declined -49.14%, versus a -6.47% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #51 of 109 ETFs in the Commodity ETFs category.

Andrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

Financial Markets – Functions, Importance And Types

The financial market is a very broad term that primarily refers to a marketplace where buyers and sellers participate in the trade, i.e., buying and selling of assets. Simply saying, it is a platform that facilitates traders to buy and sell financial instruments and securities. These instruments and securities can be shares, stocks, bonds, commercial papers, bills, debentures, cheques and more.

Financial markets are known for transparent pricing, strict regulations, costs and fees and clear guidelines. One big characteristic of such markets is that the market forces determine the price of the assets. Also, a financial market may or may not have a physical location, meaning investors can buy and sell assets over the Internet or phone.

Table of Contents

Importance

Financial markets are common to each country, and they play a major role in the economic growth of the country. Some countries have small markets, while some have big financial markets, like NASDAQ. Such markets act as an intermediary between savers and investors, or they help savers to become investors. On the other hand, they also help businesses to raise money to expand their business.

It won’t be wrong to say that investors and businesses access the financial markets to raise money and also to make more money. Moreover, they also help in lowering unemployment as these markets create massive job opportunities.

Functions

Price Determination: Demand and supply of an asset in a financial market help to determine their price. Investors are the supplier of the funds, while the industries are in need of the funds. Thus, the interaction between these two participants and other market forces helps to determine the price.

Mobilization of savings: For an economy to be successful it is crucial that the money does not sit idle. Thus, a financial market helps in connecting those with money with those who require money.

Ensures liquidity: Assets that buyers and sellers trade in the financial market have high liquidity. It means that investors can easily sell those assets and convert them into cash whenever they want. Liquidity is an important reason for investors to participate in trade.

Saves time and money: Financial markets serve as a platform where buyers and sellers can easily find each other without making too much efforts or wasting time. Also, since these markets handle so many transactions it helps them to achieve economies of scale. This results in lower transaction cost and fees for the investors.

Classification of the Financial Market

As we mentioned before that financial is a very broad term, so just mentioning their types will not give readers a good idea of the financial markets. That is why we are mentioning classification and giving type under each category.

By Nature of Assets

Stock market: This is the market where shares of the company are listed and traded after their IPO.

Bond market: This market allows companies and the government to raise money for a project or investment. Investors buy bonds from a company, which later returns the amount of bond with agreed interest.

Commodities market: In this market, investors buy and sell natural resources or commodities, like corn, oil, meat, and gold.

Derivatives market: This market deals in derivatives or contracts, whose value is based on the underlying asset being traded.

By Nature of Claim

Equity Market: It is a market where investors deal in stocks or other equity instruments. It is basically the market for residual claims.

Debt Market: In this market, investors buy and sell fixed claims or debt instruments, like debentures or bonds.

By Maturity of Claim

Money Market: The markets where investors buy and sell securities that mature within a year are the money market. Assets that investors buy and sell in this market are commercial paper, certificate of deposits, treasury bills, and more.

Capital Market: Markets, where investors buy and sell medium and long term financial assets, is a capital market. There are two types of capital market: Primary Market (where a company issues its shares for the first time (IPO), or already listed company issues fresh shares) and Secondary Market or Stock Market (where buyers and sellers trade already issued securities in the primary market).

By Timing of Delivery

Cash Market: It is the market where transactions are settled in real time.

Futures Market: In this market, settlement and delivery take place at a future specified date.

By Organizational Structure

Exchange Traded Market: A market with centralized authority and set regulations are Exchange Traded Market, like NYSE, NASDAQ.

Over-the-Counter Market (OTC): Markets with customized procedures and decentralized organization is an OTC market. It is a type of secondary market. Smaller organizations prefer this market as it has fewer regulations and is less expensive.

The structure of the financial market and its functions

World financial market: structure, functions, market participants

What is the world financial market and what is its architecture? What are financial market participants, their interaction and functions in the system? Economic indicators of financial markets.

Why do we need to study theory? The term “financial market” cannot be called a necessary one, a novice trader should learn first of all. But nevertheless, it is necessary to understand the structure of the financial market. The knowledge of how the financial market is arranged and how its participants interact with each other can suggest traders new investment opportunities, help reduce costs and minimize risks. Without knowing the theory, it is impossible to become a professional practical trader. Spend 10 minutes of your time on this review. I hope that it will be useful and helpful for you!

When reading about financial markets and how you can earn money from them, do you know what you are actually dealing with? Banks, insurance funds, pension funds – the list of structures that make up the financial market is long enough. The article will provide better understanding of the financial market is structured and operates. From this article, you will learn:

What types of financial markets exist

Who participate in financial markets and how they interact with each other

What instruments (assets) are the subject of interaction between market participants.

What functions financial markets perform

Trader’s keystones or all in due time

If someone tells you that understanding the “financial market” term, its structure and functions are essential to every trader, don’t believe them. That’s not right. However, we cannot say that this information is unnecessary. In the beginning we don’t study an A to Z of Forex. We endeavor to acquire necessary skills independently. Only when we’ve accumulated some experience by trial and error, we turn ourselves to general knowledge. It may be a webinar, a trading course, educational articles or A to Z books about Forex. According to the level of our expertise, we choose this or that kind of information. If a novice benefits from reading about 2 types of market analysis – fundamental and technical, – a more experienced trader will be interested in learning about the underpinnings of the underpinnings, that huge thing the currency market – his/her workplace- is a part of. As they say, all in due time.

The structure of the financial market

All the national and international markets make up the financial market. It incorporates banks, pension/insurance/currency funds and many other economic institutions that help accumulate and redistribute money.

Being a complex system, the financial market has a multilevel structure including 5 market segments:

1. Foreign exchange market (Forex) or Currency market

It is the market in which the subject of its participants interaction is the currency and everything that is related to its equivalent. Derivative instruments may also serve as trading instruments (for example, currency CFDs). Depending on the form, the settlement there can be cash and non-cash; according to the transaction term, the market can be current (spot) and derivatives currency markets. Derivatives market contracts can be:

  • Forward contracts. A forward contract is customized between two parties at an agreed price; intermediaries of the transaction are commercial banks, there are no guarantees.
  • Futures feature pricing, based according to the movement of currency exchange rates , intermediary is an exchange, guarantees are the reserve deposit.
  • Options and currency swaps.

Currency transactions can be performed both on the exchange and on the over-the-counter market (Forex Interbank Market, Forex).

2. Credit market

This market suggests a redistribution of spare funds from those who have them to those who do not have them. Unlike the investment market, the credit market is more complex (it has a three-tier structure) and has tighter requirements for participants to fulfill their obligations.

Credit market Levels:

  • The central bank and commercial banks. Here, the central bank acts as a regulator. By means of loans, the central bank regulates the money supply, supports banks, facing temporary troubles, keeps the liquidity of banking system and covers the cash gaps.
  • Commercial banks and their clients
  • Credit relations between legal entities

3. Insurance market

It is a separate segment, as insurance companies are one of the main investors at the global level. Providing various kinds of insurance services, they accumulate capital, which they can temporarily invest in deposits, metals, and the stock market.

4. Investment market

It is a system based on free competition and partnerships between agents of investment activity. It has much in common with the stock market, where the funds are invested in securities, but it can also take the form of capital investments, fixed assets, etc. Simply put, the investment market provides investing money in any asset for the purpose of subsequent earnings over a period of time due to an increase in an asset price or dividend payments.

5. Stock market: securities

  • It suggests a complex interaction between the market participants in terms of issuance and turnover of securities. Securities can be traded on both stock exchanges and beyond them. On the exchanges, you can trade only enlisted assets, i.e. which meet certain requirements. Assets can be:
  • Stocks. They can be common stocks and preferred stocks. Holders of common stock typically have voting privileges, whereas holders of preferred stock may not. However, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one, depending on the decisions of the board of directors.
  • Bonds. Bonds can be (issuer – company), municipal (issuer – local authorities), state, international (for example, Eurobonds). Bonds can also be preferential (the holder will be among the first to receive money during the liquidation of the company) and subordinated (more profitable, but riskier). There is a gradation on the coupon rate and yield to maturity.
  • Indices – consolidated instruments consisting of a basket of securities, which reflect average price statistics for the sector or for the industry in general.
  • Derivatives. They are derived instruments, which make up a multi-level system of securities.
  • ETF securities. An ETF is an index fund whose shares (units) are traded on an exchange. The fund’s investment structure can be anyone, ranging from securities of companies in a particular sector to a diversified portfolio, including stocks, gold, etc. Unlike shares of investment funds, you can perform any operations with ETF shares, as well as with securities.

As you see, the currency market only accounts for one-fifth of the financial market.

There is another, more general, but the more exact classification of the world market: the currency market, the stock market and the commodity market. The first one includes all operations with any currency (including cryptocurrency), the second one includes everything related to securities, the third one provides trading metals, oil, goods and services, including non-conventional investments (antiques, art, etc.). All three markets are connected by credit, investment and other relationships.

The Forex market often combines different financial markets. For example, you can trade various CFDs, such as metals, oil, shares and stock indexes at LiteForex, thus starting your career in the financial markets.

Functions of the financial market

The financial market plays an important role in our modern civilized society. It aims to mobilize capital, distribute it between industries, control and maintain the reproduction process and improve the efficiency of the economic system in general. Main functions of the financial market, carried out by its participants are following:

  • Facilitate efficient relationships between all market participants, ranging from private individuals and individual investors, to large institutional investors.
  • Supervise and regulate the processes held in the financial system: regulation of the money supply, compliance control for established rules by market participants, licensing, development of legal provisions.
  • Mobilize the capital and allocate it so that it is used most efficiently and generates added value
  • Minimize risks, including fraud prevention (anti-money-laundering). Ensure transparent pricing and avoiding price manipulation.
  • Provide market liquidity
  • Ensure privacy and transparency of the transactions made
  • Provide necessary information

The activities of the financial market are based on national banks’ liabilities to control currency rates and set interest rates. Stock and currency markets, as well as commercial banks, are directly connected with the development of the financial assets market. The securities market is the most interesting segment of the financial market in terms of investment profitability.

Participants of the financial market

Each of us is a financial market participant in a way. Each of us works somewhere, making an own contribution in GDP rate, buys something, so indirectly affecting inflation rate and the level of consumer prices. Someone becomes an investor, buying a foreign currency or collectible coins, or investing in bank deposits, investment companies, using loans.

But still, economic science classifies the participants of the financial market, based on its segment. It suggests that the financial market, in a simplified form, is a relationship between two categories of participants: sellers and buyers. The third category include intermediaries who are directly involved in transactions, providing assistance, facilitation and guarantees. The same agent of the financial market can act simultaneously as the seller, and the buyer, and the intermediary.

1. Currency market:

  • Sellers. The major sellers are the state and banks. The state that sells a currency through authorized bodies performs a regulatory function in this way. Sellers are also companies engaged in foreign economic activity (selling foreign-currency earnings) and individuals.
  • Buyers. All agents, being sellers, can act as buyers.
  • Intermediaries. This category may include commercial

2. Credit market:

  • Borrowers. At the international level, borrowers are states and the ratio of external debt to GDP is considered one of the key statistical indicators of the state of the country’s economy. At the country level, borrowers are individuals and companies, local governments, etc. A good example of a multi-level structure of the credit market is the US mortgage system, where banks issued securities for mortgages to accumulate new capital for subsequent lending.
  • Lenders. These market participants possess spare capitals and wish to increase it: individuals, investing their funds in deposits that will be subsequently directed to lending, buyers of debt securities (insurance, pension, investment funds). In a way, any investor can be called a lender, since he/she gives spare money in order to gain interest rates and invest the income in development. The state can be also referred to as a lender, which creates liquidity and distributes the money to borrowers through the central bank.
  • Intermediaries. They are all who participate organization of the money distribution: banks, brokers, dealers, managing investment companies. Insurance and pension funds can be also attributed to intermediaries, accumulating and distributing capital.

The credit market is closely related to investment and stock markets. For example, corporate bonds are both a tool for raising money and security at the same time. Government bonds are one of the favourite investment options with the lowest risk for investment funds.

3. Insurance market:

  • Insurers. These are companies, appropriately licensed to provide insurance services. There are insurance companies of open type (provide services to all market participants), captive insurers (being wholly owned and controlled by its insureds) and reinsurance risk management companies.
  • Insureds. Individuals, companies, institutions, buying insurance services to minimize the risks.
  • Intermediaries. There are no intermediaries, transactions are carried out directly between the insurer and the insured.

All markets are closely intertwined. As it has been mentioned above, insurance companies are also participants in the investment market. It also includes insurance instruments (for example, various swaps) used by agents of the stock market as well.

4. Investment market. Everyone, who invests money in a particular asset, is an investor. The intermediaries can be banks, exchanges, different kinds of funds and so on.

5. Stock market:

  • Securities issuers. These include companies and organizations that issue certain securities: stocks, bonds, etc. When issuing, issuers agree that they must fulfill all the requirements specified (agreed) at the time of issue.
  • Investors. They are all those who buy securities in order to generate income. There are strategic (buying a majority stake) and minority (making up a portfolio, buying the securities in order to only generate income).
  • Intermediaries. Stock exchanges, banks, underwriters, ranking agencies, auditors and other participants, engaged in facilitation for issuance and placement of securities.

The classification, described above, can be grouped in the following way:

  • The state and the central banks (regulating and supervising organizations). Managing the biggest volume of the capital, these agents mostly perform supervising and regulation function.
  • Regulators (regulatory and supervisory institutions). Establishments that don’t take direct part in transactions (that is why they can’t be referred to intermediaries), but the perform a controlling function. The supervisory function is also carried out by the central bank and the state government, but it can also be a separate institution, like a self-regulatory organization (SRO).
  • Financial Services Companies (organizations providing financial market services and financial intermediaries). These are institutions involved in organizational work: currency, stock and commodity exchanges, brokers, underwriters, auditors, depositories, registrars, clearing and consulting companies.
  • Banks (financial intermediaries). They are intermediaries involved in the capital distribution, market regulation and supervision for the established rules compliance.
  • Legal entities (lenders, investors, borrowers). The most extensive group of participants: companies engaged in the placement of clients’ pension savings, investment services, insurance companies, hedge funds, trust management companies, brokers, dealers, individual lending organizations, companies engaged in any type of financial activity, participating the in money turnover.
  • Individuals (lenders, borrowers, investors): traders, speculators, individual asset managers, long-term investors, and just ordinary people, as it was mentioned at the beginning of the part.

Important indicators of the financial market – a note for trader

For efficient trading and a perfect grasp of Forex affairs, a trader needs to know the indicators that help assess the situation in the financial market. These indicators include periodic releases of macro- and microeconomic data on the market state intended for more accurate forecasts and productive analysis. GDP, unemployment and inflation levels, currency or securities growth or fall rates also belong to those indicators. As a rule, experienced traders actively use economic calendars freely provided by brokers. I recommend you take up this habit if you haven’t yet. There is a brief description of some most important indicators, recorded in the economic calendar and some tips on how to analyze them:

  • Interest rate. It is one of the major economic tools to manage the money supply, thereby adjusting the inflation. It the interest rate gives loans to commercial banks. A higher interest rate increases interest rates for credits and deposits and so encourages consumers to invest. This, in its turn, reduces the inflation rate. The influence of raising the interest rate depends on a country’s economy. For advanced economies (for example, the USA), a higher interest rate increases the exchange rate of the national currency. In less developed countries, raising the interest rate can be seen as a try to curb stagnation and so increase investors’ interest.
  • Non-Farm Payrolls. Report on the change in the number of jobs in the US non-farm sector. It is considered to be one of the most news reports, but its impact on the US dollar rate lasts a relatively short time (a few hours). It is released on the first Friday of the month at 1.30 p.m. GMT. In theory, the US dollar exchange rate will be influenced if the Non-Farm actual data deviates by more than 40,000 from the forecasts. In practice, much depends on the accompanying statistics and investors’ sentiment.
  • Consumer Price Index (CPI). It measures changes in the price level of a market basket of consumer goods and services purchased by households in the country. Changes in the CPI are used to assess price changes associated with the cost of living The index for the current year is analyzed, compared to benchmark (reference) indicator. The statistical base for calculation is recommended by IMF, EBRD, UN, but there is no single approach, each country has its own peculiarities of calculation. The calculation methodology can be based on Lowe index, Paasche and Laspeyres price indices. If the index declines it means that consumer purchasing power (real demand) also declines and can partially suggest higher inflation growth rate.

I think everything is clear about such indicators as GDP, inflation, unemployment: the better the indicator, the more positive is the sentiment of investors in the currency and stock markets.

An important point: the economic calendar is only an information complementary tool and it can in no way serve as the major tool to base trading strategies on. At the time of the news release, the market is especially volatile; therefore, the calendar is often used the other way around in order to exit trades.

If you are still willing to try trading on economic news, I offer you a few tips:

  • Compare the actual value with the forecast. If, for example, the GDP growth was 2%, compared to the forecast of 2.5%, it will have a negative influence on the market. Keep in mind, that the data can be revised.
  • Assess the chances for an event and investors’ expectations. For example, if the Fed is expected to hike the federal funds rate at the upcoming meeting, investors will consider it in advance and they won’t be any strong swings at the moment of the news release.
  • Compare the news importance with other factors. For example, while in quiet times, the release of statistics on US crude oil stockpile has a quite strong influence on the foreign exchange rates, as well as other trading instruments, then, during the peak of the US-China trade war, these data were hardly noticed.

To try trading in the financial markets, register and begin your career of a successful trader.

That’s all for now.

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Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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