FINANCIAL MARKETS Good day, Below is the assignment, i have attached the previous milestones. This final paper is a continuation from the previous milestones. thank you 7-2 Final Project Submissio

Running Head: FINANCIAL MARKETS 0

Financial markets are marketplaces where investors trade securities. They are vital features of capitalist economies and include the stock market, forex, bond market, and derivatives (Madura, J. (2020). The stock market is a marketplace that offers companies an avenue to list their shares to traders and investors. The bond market is avenue corporations, and governments use to raise money to finance their investments or projects. Investors buy bonds from these corporations at an agreed interest rate for a specific period. Commodities markets are avenues that offer producers and consumers to exchange different physical products such as agricultural products, precious metals, petroleum products, and soft commodities.

Financial markets are significantly affected by the macroenvironment such as fluctuating political and social climates. The political climate changes include factors such as changes in the government, political instability, legislative changes, military control, etc. The social climate includes current news and events, such as terrorist attacks, wars, riots, etc. Governments make political decisions that affect businesses in their market, such as introducing new taxes, trade tariffs, environmental regulation, labor laws, etc. The most recent case example occurred in China in 2020 when investors in the Ant Group, a subsidiary of the Chinese multinational giant Alibaba, felt the impact of changing political changes when Chinese regulators canceled its IPO (Oxford Analytica, 2020). This illustrates that these factors significantly impact investment options, operations, and returns.

Financial markets are also affected by the economic cycles of the country. The most common cycle in most western capitalist economies is the boom-and-bust cycle. The boom period is accompanied by low unemployment rates, wage growth, a bull market, and rising real estate prices. The central bank reduces barriers to obtaining credit through measures such as low-interest rates, and thus individuals and for-profit institutions borrow capital for investment. Subsequently, investors earn high returns from the market, and the economy grows. Companies get raise higher amounts of capital during IPOs launched the bust period. The was recent economic boom in the United States was from 2009-2020. It was known as the ARRA and QE after the American Recovery and Reinvestment Act of 2009 (ARRA). This was a federal program implemented by the Obama government to counter unemployment and steer the economy after the Great Depression of 2008 (Act, 2009).

However, the economic growth reaches its peak and stops expanding after some time. This is called the bust cycle. The availability of excess credit from lenders makes individuals and businesses overinvest. The investments in the market outweigh the market demand, and thus they lose value. Financial institutions increase interest rates, making it difficult for individuals and businesses to obtain credit. Investors lose their money and confidence in the market, and consequently, there is limited capital for investment. Companies reduce operating costs, and many people lose their jobs. The increased unemployment rates reduce consumer spending. This period is also called economic recession or depression if it's more severe and persists for long periods.  Studies show that the 2020 Coronavirus pandemic was a bust which had widespread impact on financial markets (Cumming, 2020).

Stakeholders in the financial markets constantly monitor the country's level of inflation and interest rates. Inflation can be defined as the uncontrolled rise of prices of goods and services in the country. Inflation reduces the purchasing power of a nation's currency, and thus consumers purchase few goods, businesses record low revenues, and the economy slows down. Scholars have conducted several studies to investigate the relationship between inflation and market performance. These studies show that expected inflation can positively or negatively affect the stock market depending on the government's fiscal response or the investor's ability to reduce the associated risks.

Interest rates refer to the cost individuals or businesses pay for using another party's capital to invest. The Federal Open Market Committee sets interest rates in the United States. These rates are often used by financial institutions such as banks to borrow or lend money to each other, and thus, it usually takes at least one year for the rate to have a widespread impact on the economy. However, changing interest rates have an immediate effect on the stock market. Therefore, investors should know the relationship between interest rates and market performance to make informed financial decisions.

Governments control inflation by changing fiscal policies in the country, such as raising interest rates. Raising interest rates increases the cost of borrowing for financial institutions. These institutions increase the rate they charge their customers on different credit options such as mortgages and credit cards. Therefore, there is less capital available for investments. The increased costs reduce the amount of money available to consumers to spend, reducing business revenues and profits. Subsequently, businesses have to deal with two factors that affect market performance, earnings, and stock prices; increased borrowing costs and reduced consumer spending

Financial markets are significantly affected by changes in the microenvironment. Ant Groups ' saga with Chinese authorities, show how the extremes of governments control on stock markets. Bonds are issued at fixed rates which does not account for changes in the financial markets, such as inflation. Therefore, the bond market is significantly affected by changes in its external business environment. The prices of products are affected by inflation and other external factors mentioned above. Commodities markets provide investors with a hedge against inflation. They have a low negative correlation compared to stocks and bonds and offer protection from the effects of inflation.

Act, R. (2009). The American Recovery and Reinvestment Act of 2009. Public Law, 111(5), 5-30.

Cumming, D. J., Martinez Salgueiro, A., & Sewaid, A. (2020). COVID-19 Bust, Policy Response, and Rebound: P2P vs. Banks. Policy Response, and Rebound: P2P vs. Banks (November 5, 2020).

Madura, J. (2020). Financial markets & institutions. Cengage learning.

Oxford Analytica. (2020). Halted China IPO sends political and policy signals. Emerald Expert Briefings, (oxan-db).