some time ago. a friend and I had a conversation about market price movement... in his wisdom, i was reminded that fundamentally price movements are caused by none other than the first principal of economics, demand and supply... this is not an unfamiliar concept to many of us here...although we often forget ...
"market sentiments" as a concept is intimately tied to "demand and supply" principal.
often, we hear people asking : "how is it that just last week, when the world thought the european nations are collapsing under its debts, that this week, the euro currency is soaring? is the problem over? is it true that the issues are all resolved?"
i think, in this case above, euros soared, bcos the buying pressure exceeded the selling pressure; 1st principal of demand and supply, which my friend talked about...
that puzzles us as to why the demand is now stronger than a week ago, when obviously the financial crisis cannot have mutated for the better in over a few days....
imo, the problem by itself, is not the main reason for the price gyration... it is the collective reaction to the problem, the consolidated opinion of the market players, that sway the price one way or the other....
market players can and are often wrong about any given situation...Lehman, Bear Sterns, Dot gone, length of recession, etc... this could be due to the lack of info, misinformation or simply a wrong assessment.... and as information streams in, market opinion will eventually more accurately align itself with the reality of that problem... this is what "market sentiments" is all about...it is no more than an aggregated opinion on a situation.
market sentiments on a situation, create the demand or supply for that relevant traded instrument; such as eur/usd was actively traded when Greece threatened to go bankrupt ...
the financial crisis over at Greece probably hasn't changed much in the last 2 months; very likely, they are still in huge debt and have very little ability to pay for their loan obligations by themselves... yet, the Euros have stopped losing value since it hit a low of 1.18..today, it is about 1.27 against the greenback.
so, if Greece's problems are still around, then what has changed?
i say to you, it is the Market's opinion that have changed. it perceives that Greece is no longer an imminent threat to the global financial system, now that those rescue packages from IMF and ECB have flowed into Greece.
with this change in Market Sentiment, the demand and supply equation is now re-written....
in summary, problems do not get solved in a short timeframe and it almost always stays problematic over a short timeframe...what has changed is the market players' opinion, collectively known as Market Sentiments... and that causes the relevant instruments to change in value...
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