Bloomberg Market Concepts

Core economic indicators

Economic growth, inflation, unemployment, business confidence, and housing

Real GDP

GDP adjusted to strip out inflation

CPI (Consumer Price Index)

Measures inflation via the price of a basket of goods, updated periodically as spending habits change

Recession (rule of thumb)

Two consecutive quarters of declining real GDP

PMI (Purchasing Managers’ Index)

A survey of purchasing managers measuring the health of manufacturing and services; above 50 signals expansion, below 50 contraction

GDP reporting lag

It takes about a month after a quarter ends to compile GDP data

Monitoring GDP between releases

Through other key indicators released monthly

US Economic Surprise Index

Measures how much economic data beat or missed estimates

Surprise index and the S&P 500

Movements tend to lead the S&P 500, though not reliably

Long-term economic estimates

The foundation of financial models

Money

Any asset accepted as a medium of exchange

Currency

A country’s official legal tender

US dollar’s dominance

Most central banks hold reserves in dollars and key commodities like oil are priced in dollars, making it the default for trade

Major floating (G10) currencies

Currencies of leading industrialized economies (e.g., USD, EUR, JPY, GBP)

Emerging floating currencies

Currencies of other countries; not fully floating and not easily converted to dollars by offshore investors

Fixed (pegged) currencies

Held at a set rate against a major trading partner’s currency to reduce volatility; the central bank must defend the rate

Cryptocurrency

Digital currency recorded on a public blockchain, with supply outside any central bank’s control

Spot trade

Immediate exchange of currencies

FX swap

Exchanging currencies now and reversing the exchange at a set future date

Three main users of FX markets

Institutional investors, corporations, and retail investors

Institutional FX users

Equity investors, fixed income investors (who treat FX as an asset class), and commodity traders

Commodity traders hedging with the dollar

Since commodities are priced in dollars, traders take an opposite dollar position to offset currency swings

Market maker

Quotes a bid (price it buys at) and ask (price it sells at) and stands ready to trade

Currency speculator

Trades FX to earn a profit

Currency hedger

Uses FX transactions to reduce risk

Arbitrage

Buying low in one market and selling high in another

Purchasing power parity (PPP)

Exchange rates should adjust so a basket of goods costs the same in every currency

What drives exchange rates

Each currency’s economic conditions

Tightening monetary policy

Raising interest rates to curb inflation

Loosening monetary policy

Cutting interest rates to stimulate growth

Economic openness

Measured by a country’s exports and imports relative to its economy

Open economy’s currency risk

Heavy exporters are exposed to swings against their trading partners’ currencies

Net exporter’s currency preference

A weaker currency, making its goods cheaper for foreign buyers

Net importer’s currency preference

A stronger currency, making foreign goods cheaper

Budget deficit

Government spends more than it receives

Three ways central banks influence FX

Direct, verbal, and interest rate intervention

Direct intervention

The central bank buys or sells currency to raise or lower its value

Verbal intervention

The central bank warns it may intervene; markets often move the currency in anticipation

Interest rate intervention

Adjusting short-term interest rates; raising them attracts capital and supports the currency

Stronger currency and inflation

Tends to lower inflation by making imported goods and raw materials cheaper

Counterparty risk

The risk the other party fails to pay at the agreed exchange rate on the settlement date

Market risk

Risk from FX price moves, including transaction and translation risk

Transaction risk

Gains or losses on actual cash flows due to exchange rate moves

Translation risk

Exchange rates change the reported value of foreign assets in financial statements; affects accounting results, not cash flows

Currency appreciation

A currency’s value rising relative to another

Forward outright

An agreement to exchange currency at a fixed rate on a future date, locking in the rate for a known future payment

Option contracts

Let holders benefit from favorable currency moves while limiting losses from adverse ones

Call option

The right, but not the obligation, to buy a currency

Put option

The right, but not the obligation, to sell a currency

Ceteris paribus

All else being equal

Higher-than-expected GDP

Strengthens the currency as investment flows in and demand for it rises

Fundamental forecasting

Predicting currencies from macroeconomic data like growth, inflation, and rates

Quantitative forecasting

Predicting currencies using statistical models

Technical (sentiment) forecasting

Predicting currencies from price charts, trends, and market positioning

Fixed income

The bond market, the largest financial market in the world

Largest fixed income segment

Government (sovereign) bonds

Why countries hold so much US debt

Treasuries are the main place to store FX reserves, including dollars bought to keep their own currency weak

Parking FX reserves

Storing reserves in a safe, liquid asset

US Treasuries as a safe haven

Viewed as the safest place to park FX reserves

Outstanding bond

Issued but not yet matured

Why companies issue bonds

Interest is tax-deductible (the tax shield), and bonds allow longer-term borrowing than bank loans

Coupons vs. principal

Coupons are periodic interest payments; principal is the lump sum repaid at maturity

Bond yield calculation

The IRR of the bond’s cash flows (yield to maturity)

Two main drivers of bond yields

Credit risk and macroeconomic factors

Default

Failing to make a required payment on a loan or bond

Bond prices and repayment risk

Today’s prices reflect how likely repayment is

Fiscal discipline

Overspending governments face higher yields and lower bond prices, pressuring them to borrow less

Credit rating

A grade (AAA to D) from agencies like S&P, Moody’s, and Fitch, based on the borrower’s finances, debt levels, and economy

Credit default swap (CDS)

Insurance-like contract: the buyer pays premiums and is paid out if the borrower defaults

Credit spread

The extra yield a bond pays over a safe benchmark (like Treasuries) to compensate for risk

Bid-ask spread

The difference between the price a market maker buys at and sells at

Inflation and bonds

Rising inflation erodes bond values, pushing yields up and prices down

Inflation’s effect on lenders vs. borrowers

Lenders are repaid in money worth less; borrowers repay fixed debts with cheaper money

Deflation

Falling prices lead consumers to delay purchases, cutting revenues and jobs

TIPS (Treasury Inflation-Protected Securities)

US government bonds whose principal adjusts with CPI; many countries issue similar inflation-linked bonds

Output gap

Actual output vs. potential output; negative means below potential, positive means above

Raising short-term rates to fight inflation

Higher rates reward saving and make borrowing costlier, cooling spending

Bond investors expecting rate hikes

Sell long-term bonds, shift to shorter maturities, or move into floating-rate or inflation-linked bonds

SPAC (special purpose acquisition company)

A shell company that raises capital to buy a private company, taking it public

Equity holders’ claim

Paid from residual cash flows after all other obligations

Interest and taxes

Interest is paid from pre-tax income (EBIT to EBT), creating the tax shield

Earnings announcements

Released quarterly

Earnings and stock prices

Better-than-expected earnings may lift a stock, but not always if guidance or spending disappoints

Estimating future earnings

Based on industry classification, suppliers and buyers, revenue projections, and cost base

Supply chain insights

Lead to more accurate earnings estimates

Cost base

Analysts separate fixed costs from variable costs

Actuals

Reported historical results, as opposed to estimates

Beat vs. miss

Results above analysts’ expectations are a beat; below are a miss

Stock split

More shares at a lower price, same total value; done when the share price gets high, to improve affordability and liquidity

Reverse stock split

Fewer shares at a higher price; done to lift a low share price, often to meet exchange listing minimums

Reasons for share buybacks

Signal confidence, return cash to shareholders, boost EPS, and offset dilution from employee stock