The Orwell piece that I mentioned yesterday chimed with something that I was thinking about that morning: the relationship between news, reality and markets. Here is a first attempt to set out what I think about the relationship, with examples.
- Reality can move markets. QE creates money that flows into equities, driving up prices.
- Markets can focus on varying aspects of reality. Today they are focussing on the improving US consumer picture and not on unemployment.
- The market focus can drive the news. Sugar prices rise because traders hear about poor planting conditions in Brazil; poor planting conditions in Brazil are reported.
- News also focuses on varying aspects of reality. The headlines report a successful European agreement, even though it does nothing to address current problems.
- The news focus can drive the markets. Reports of Chinese buying of Portuguese debt drive up the euro.
- Markets can alter reality. Higher equity prices have a wealth effect.
- News can alter reality. Reports of job losses hurt consumer confidence.