We often hear about expansionary policies that governments undertake from time to time. It is important to understand what it means and how it affects financial markets. When a government decides to undertake an expansionary macroeconomic policy, it usually pursues to increase the money supply and thus stimulate the economic growth. There are fiscal and monetary types of expansionary policies.
Fiscal type of expansionary policy would entail tax cuts, higher government spending on various projects, rebates, jobs programs and similar. This is exactly what Chinese government is considering right now. They are fearing a slowdown in their economic growth, thus finance minister Lou Jiwei is urging the country to use a sort of expansionary fiscal policy. It is reported that spending is going to be directed at areas like infrastructure projects and social security. In order to give a strong impulse to its growth perspectives, China also appears to be willing to increase its fiscal budget deficit.
Another type of expansionary policy is of course a monetary one. This is done through Central Banks – they might decide to decrease the benchmark rates, or they might decide to start buying bonds or other assets directly on the open market. This process would increase capital that an economy has at its disposal. The European Central Bank’s bond buying programme has just started, and has resulted in European yields falling close to record lows. The Euro continues to fall relative to US dollar, while European companies are becoming more competitive and their share prices are rising.
External factors are heavily influencing financial markets all around the world. When prices shift from one range to another is exactly the moment when new trends are born. We can use technical tools to find new trends and therefore use these opportunities in our advantage.