Stock markets and monetary policy

<body><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td> <font face="garamond, times new roman, times" mstheme> <p> Liquidity </p> <p> </p> </font mstheme> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td valign="top" width="1%"><font face="garamond, times new roman, times" mstheme> <p> </p> </font mstheme></td><td valign="top" width="24"></td><td valign="top"> <p>This page uses frames, but your browser doesn't support them. </p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Shares: Liquidity</font></strong></p> <p><strong><em><font face="Arial Narrow" size="2" color="#00FF00">Buy on the up arrows,</font><font face="Arial Narrow" size="2" color="#C0C0C0"> </font><font face="Arial Narrow" size="2" color="#FF0000">sell on the down arrows</font></em></strong></p> <p><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>This tool is intended to predict share prices based on government policies, using data on monetary policy available at the time, specifically interest rates or real effective exchange rates, as calculated by PIT for all countries in the database. For comparability stock market indexes have been rebased to set year-end 1994 at 100. </strong></font></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">In each chart the stock market index is shown as </font><font face="Arial Narrow" size="2" color="#FFFFFF">the thick white line</font><font face="Arial Narrow" size="2" color="#C0C0C0"> on the right hand axis. The main explanatory variables, interest rates (or real effective exchange rates in the case of the global perspective) uses the left hand axis, shown as</font><font face="Arial Narrow" size="2" color="#FFFF00"> the thin yellow line</font><font face="Arial Narrow" size="2" color="#C0C0C0">. Best Guesses as to the effect on markets are shown as </font><font face="Arial Narrow" size="2" color="#FF0000">red arrows </font><font face="Arial Narrow" size="2" color="#C0C0C0">embedded in the price index.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">The selection of monetary variable depends on the choice of investment perspective. Interest rates are useful in predicting share prices in absolute terms, either in Local Currency or Dollars but tend to have an opposite effect on the exchange rate, so limiting their usefulness for global comparisons. Therefore for the Global Perspective only, real effective exchange rates are used instead. The series is expressed as a rate of change indicator. </font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">This tool works on the assumption that governments rarely make a change in policy all at once, but spread out over a number of intermediate steps, so the effects of a change create a trend over time that investors can exploit. However, in times of crisis this is not the case. Buy signals for the Local Currency and Dollar are generated when interest rates begin to fall. Sell signals arise when the converse applies. Buy signals for the Global Perspective are generated when the real effective exchange rate accelerates and sell signals when it decelerates. Noise reduction methods have been employed to minimise the number of signals.</font></strong></p> <hr color="#FF0000"> <p align="center"><font size="2">[ <a href="global_asset_allocation_sitemap.htm" target="_top">Site Map</a> ] [ <a href="index.htm" target="_top">Home</a> ] </font><font size="2" face="Arial"><br> </font><font size="2">[ <a href="Chart_Library.htm" target="_top">Chart Library</a> ] [ <a href="ChartLibrary_stock_market.htm" target="_top">Share Charts</a> ]</font> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td><font face="garamond, times new roman, times" mstheme> <p align="left"><font face="Arial Narrow" size="1" color="#C0C0C0">Copyright © 1999 Professional Investment Tools Ltd., authorised by the Financial Securities Authority. An Independent Financial Adviser. Please read Financial Health Warning and Licence Agreement. UK laws apply exclusively. Principal sources: Consensus Economics, Corel Corp., FIBV, Global Financial Data, PIT, national governments and stock exchanges. Information and opinions are based on sources believed to be reliable and accurate. However PIT does not guarantee this to be the case, and does not accept liability for any loss arising. This is for information only and does not constitute a solicitation to deal in any securities. Opinions are liable to change. Past performance is no guarantee of future success. Last modified: January 05, 2001</font><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>.</strong></font></p> </font mstheme></td></tr></table></body>