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Sunday 30 November 2025

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Impact of the news backdrop on financial markets and stock indices

There are more and more ways of making money in the world. If you are interested in economics and have the desire and ability to invest, you should learn how the market works. There are two types of analysis that can help you understand the patterns of rising and falling prices: technical and fundamental.

The difference between technical analysis and fundamental analysis is that they study different objects. During technical analysis, the focus is on the price movements of an asset. Fundamental analysis, on the other hand, focuses on the financial performance of the issuing companies, the ratings of professional analysts and the global situation which is going on around these companies and their assets.

It is fundamental analysis factors that create forces in the financial markets known as supply and demand. Let's look at this phenomenon in more detail. So, if more people want to buy an asset (shares, futures, currencies, etc.) than sell it, then prices go up. And vice versa. But what exactly makes people prefer some assets and discard others? And that's where one of the main factors in fundamental analysis comes in - the news background which influences people's asset selection and financial markets in general.

Positive and negative news

Positive official news such as joint venture agreements, securing new orders, good sales figures, new products, excellent financial results of the companies as well as positive overall economic and political indicators lead to increased demand and higher prices for the company's assets. Prices are slowly but surely responding to the positive news.

All things considered, one might think that official positive news always drives prices up, but this is far from always the case. The reason for the opposite price movement can be unofficial news, so-called "rumours", which have the same impact on prices as official news.

Positive official news on the back of positive unofficial news tends to give the market a good momentum and the prices of the asset move up rapidly.

It is different when negative "rumours" emerge in the face of official positive news. The market reaction can be mixed and asset prices are likely to go slightly down. Further developments in the market will only depend on the veracity and confirmation of these rumors: if they are confirmed, the market will definitely react with a move down; but if they are not confirmed, then the reaction can be absolutely drastic and the market will not only win back the move down, but can also rally sharply upwards.

It is worth noting another proven fact that good news at home and bad news abroad can adversely affect asset prices. The international market is intertwined with the domestic market in any country. Sometimes all it takes is a bit of bad news from abroad for a market day to turn negative.

Bad news is faster than good news

The market reacts nervously to bad news. Owners may sell shares under the influence of rumours to avoid losing money. Good news reaches the market more slowly and needs to be checked.

Negative news has a stronger impact on asset prices and investor attitudes than positive news. Asset prices react very strongly to negative news, which can seriously discourage ordinary people from buying them.

The market reacts in much the same way to both official and unofficial news, so it is important to follow both categories of news in order to interpret them correctly for future market forecasts.

Good news - bad news

There is some news that may seem negative at first, but in fact it is not. For example, the dismissal of the CEO or first officers. This may sound very negative at first, but it shows that the board of directors of the company, has been brave enough to take decisive action to further develop the company in the long term.

Another example, redundancies in a company. This is usually good for the company and its asset value because costs will be reduced significantly and quickly. This should help to increase earnings immediately. This is one of the quickest ways to cut costs if sales have not met expectations.

Unexpected news has the strongest impact

Unexpectedly good or bad news moves companies' valuations the most - most importantly, the news has to be noticeably out of line with investors' expectations. These expectations are non-public and difficult to monitor. Roughly speaking, if there is news and the stock has fallen in value, it is bad.

The market also loves insider news. Analysts listen to their sources inside the company and incorporate the information in their reports. Sometimes, on the surface, all is well, but the stock's outlook is disappointing - the analyst has found out about a hidden conflict of owners.

Market sentiment and news

Market sentiment is also an important factor. Market sentiment is the general attitude of investors towards a particular financial asset or the financial market in general. Market sentiment is the mood or trend of a market, or its crowd psychology, which manifests itself in the activity and price movements of the assets traded in that market.

Market sentiment is an important factor when it comes to the impact of news on asset prices. In a predominantly negative atmosphere, even a small amount of disturbing news is enough for asset prices to collapse. The reverse is also possible. Market sentiment is not always based on fundamentals. For example, fundamentals might point to economic recovery, but market sentiment might be negative.

Blogs and news

In addition to news that comes from the media, such as television channels and news newspapers, which publish current news, blogs are another category that influences investors. The difference between a blog and other sources of information is that a blog is usually maintained by an individual with regular commentary on the news coming out - opinions and explanations of these events.

Blogs are getting a lot of attention these days, but you have to be very careful as different authors interpret the same event in different ways.

News and stock indices

Stock indices react to the news backdrop in the same way as stocks, but with the factor that a stock index is a measure of the price movements of a particular group of securities. It can be thought of as a "basket" of securities grouped together by a particular characteristic. A stock (or stock exchange) index is used to provide an overall picture of the stock market performance of a sector, country or private investment portfolio.

Indices are less volatile than individual stocks of certain companies, so in order to move the indices in one direction or another, you need global news that affects an entire industry or country. News from individual companies does not change the index movement much.

Indices do not react immediately, as in the case of equities, but over time. Sharp daily spikes in indices are very rare. Therefore, it takes more time to trace the dynamics and the real impact on indices than in the case of stocks.

Example #1
Date: end of February 2020
News: The coronavirus pandemic has become a global news story that has affected stock markets around the world. In late February 2020 alone, as news of the coronavirus began to gain traction, global markets lost $5 trillion in capitalisation in a single week. During that period, the Dow Jones made its biggest one-day drop in history, losing 1,191 points (nearly 4%) all at once.
Result: Dow Jones index -4%.

Example #2
Date: June 2018
News: Due to the US-China trade war, the Hang Seng Index (Hong Kong stock exchange index) is down more than 17% in June-October 2018, after rising 40% in 2017.
Result: Hang Seng Index -40%.

Example #3
Date: 2008
News: As a result of the 2007-2008 financial crisis, which began with the US mortgage crisis, the S&P 500 index fell by more than 50% in two years, the index gained more than 320% over the next 10 years.
Result: S&P 500 index -50%.

Conclusion

The news has a direct impact on the financial markets. They can make a bad day good or a good day bad. The relationship between news and markets can be highly unpredictable. Sometimes even a single headline in the media can change the direction of prices. In general, good news should have a positive effect on prices, while bad news should have a negative effect. However, this is not always the case. Just because the news is bad does not mean it is a bad day for the stock market. Sometimes bad news is perceived as good news and vice versa.

The price of an asset usually reacts faster to negative news than to positive news. In addition, the impact of new information depends on how unexpected the news is. Market sentiment is also an important factor, as news is heavily influenced by it.

Market sentiment is not always based on fundamentals. Often market participants overreact to new information, provoking a larger impact on prices than they should. Typically, price swings due to overreaction are short-lived and prices eventually return to their true level.

Using news to make money from it is very difficult, because you have to dig through a huge amount of information, have access to insider information and have truly outstanding analytical skills. That is why investment funds, brokerage companies, banks and other institutions related to financial markets and making money on them have in their structure whole financial and analytical departments with a large number of specialists analyzing and interpreting the information obtained. The results are used to make predictions about the price movements of this or that asset.

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