Macroeconomics is the big-picture view of global finance. Economies and markets aren’t static, they move and change on multiple levels. ‘Macro trends’ are shifts that are on the largest scale: international economics and their rhythms. They affect the finances of nations, as well as having a trickle-down effect on the person in the street. So, macroeconomics is the side of economics that deals with large-scale economic factors on a national or global level.
Just like in individual trading, there are many different ‘time frames’ that a macro trend can have. Some last a few months (known as cyclical trends), while others can last decades (known as secular trends).
Here are some examples of macro trends that have been observed in our financial markets in the past several years:
As we can see, interest rates changing (i.e. the rates market) is only one example of macro trends - but it’s a significant one. Because changes in the interest rate directly affects how much cash, savings and other interest-accruing assets are worth, it has a ripple-effect on the whole economy.
When a country’s central bank raises interest rates, cash and interest on loans is typically worth more. But often bonds, which have prices that move inversely to yield, are often consequently worth less. Higher interest makes some markets perform worse, while others perform better - and traders often pivot their attention away from certain assets and towards others as a result.
Banks and businesses are affected by the effects of more expensive interest too, and it often heralds a time of less spending, which can cause economies to contract.
The opposite is also true. Lower interest rates usually mean more consumer demands and spending, plus a renewed focus on asset classes that aren’t directly linked to high interest rates (like bonds, real estate and bank stocks). However, while it may mean less pressure on consumers’ wallets, it also means things like savings - which are dependent on interest accumulation to appreciate - are worth less.
There are a number of elements that drive changes in interest rates and, as a result, change the macro landscape in financial markets. Some of these are:
Macro trends are just trends on a much larger scale, and how to trade them successfully remains the same: correctly spot a trend and its direction in time to take advantage of the market sentiment and momentum, making a profit from riding it. The second half of the equation is just as important: correctly determine when the macro trend is waning and exit your positions banking on that trend before you make a loss.
However, due to the sheer size and length of macro trends, this can be far from simple. So, how do people trade on macro trends, in the interest rates space or anywhere else?
Trend analysis is the name for using technical analysis methods in the hopes of determining current or upcoming trends in your chosen market. A number of technical indicators can be used for this, such as the RSI, MACD and ADX indicators to name a few.
Once you have some knowledge of trend analysis yourself, you can add to this by staying up to date with market reports and latest data on ongoing and potential future macro trends. Examples of this would be real GDP growth figures as they're released, or demographic trends and consumer data across various countries and industry-specific reports relevant to your chosen market, all of which can reveal common trends and themes in the current economic climate.
Because 'trends' can be an ephemeral term, there are also several tech offerings that aim to quantify macro trends using real-time market data and advanced analytics capabilities - a bit like the technical indicators on a trading platform, but designed to specifically provide insight into market trends. Some use straight-up data analytics to garner insight, while others use machine learning and Artificial Intelligence as well.
With us, you can trade on changes in interest rates, and other macro trends, using hundreds of different financial instruments over various platforms. These include trading on currency pairs using forex, indices like the Nasdaq and currency indices too, commodities.
You can also open a ‘carry trade’, a specific type of position used by macro trend traders which entails opening a position, borrowing from your broker to do so, at a lower interest rate, then holding that trade open for a longer period of time until a higher-yielding rate comes in. Carry trades are usually used for forex positions, but can also apply to other markets.
Here's how to trade step by step:
Want to find out more? Discover how to trade on inflation like a macro trend expert with market analyst Chris Weston, Pepperstone’s Head of Research. |
Also, keep up to date with the latest macro happenings in our market analysis news.
What is the definition of a macro trend? And what have they got to do with interest rates?
A macro trend is a large-scale economic trend which has an international scope, or at the very least affects an entire country, and takes place over the space of months or even years. In other words, it's a large-scale, 'supersized' market trend.
Significant changes in interest rates, either globally or in a macroeconomically influential country, is a type of a macro trend.
How do changes in interest rates affect the markets on a macro level?
Changes in the rates market has a direct effect on a nation's economic growth and the expansion or contraction of their finances. It also has a domino effect of all sorts of various asset classes, including the stock market, foreign exchange of currencies, the bonds market, commodities and more as we’ve highlighted above in the article - but may have more far-reaching and unpredictable consequences than even those.
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