Question

In what ways do financial markets grade government economic policies?

Answer 1

Financial markets are continuously evaluating the policies of Government through continuous force of demand and supply in different markets like bond market or stock markets or currency markets.

When the policies will be announced by the government, the market will be efficient enough to trying to discount those policies into the overall prices of various stocks in the stocks market because those economic policies are eventually affecting a certain amount of stocks in a positive manner and those economic policies will be negatively impacting certain stocks, so they will be trying to discount those information quickly into the market price like recently we can see that when the the interest rate has been cut by the Federal Reserve there was a bullish rally in the market.

Bond markets are also efficient enough to discount these informations into their prices because when the economic policies will be announced the bond markets will also be trying to discount upon various economic policies and they are considered defensive market rather than equity market which is highly aggressive in nature, so they will also be trying to discount these informations efficiently through constant generation of demand and supply

Currency markets are also reflecting its reactions upon implementation of a policy of the government because the domestic currency will be trading in respect to multiple Global currency in the currency market and they will be trying to discount all such information related to fluctuations of economic policies in respect to the fluctuations of domestic currency so they will also be reflecting upon the value of different currencies.

Apart from these markets, there will be commodities market which will also reflect to various economic policies which are decided by the government so that we can say that the financial markets will be trying to adequately discount is policy in estimation of the impact which will be made by this policy in the future so, due to the futuristic nature of these financial markets they will be trying to discount the effect of these economic policies.