1. Inflation:
*Impact on Money Markets: High inflation erodes the purchasing power of money, prompting central banks to raise interest rates to curb inflation. This leads to higher borrowing costs for businesses and individuals, potentially slowing economic activity.
*Impact on Capital Markets: High inflation can increase uncertainty about future earnings and make investors demand higher returns for holding long-term assets, leading to lower stock valuations and higher bond yields.
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2. Interest Rates:
*Impact on Money Markets: Central bank interest rate decisions significantly affect money market rates, influencing borrowing and lending costs. Higher interest rates can make it more expensive for businesses to access short-term funds.
*Impact on Capital Markets: Interest rate changes influence the attractiveness of bonds and other fixed-income securities. Rising interest rates make existing bonds less appealing, causing their prices to fall. This can also impact stock valuations, as companies may face higher borrowing costs.
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3. GDP Growth:
*Impact on Money Markets: Strong economic growth typically leads to increased demand for credit and can push interest rates higher. Conversely, weak economic growth may prompt central banks to lower interest rates to stimulate borrowing and investment.
*Impact on Capital Markets: Â A strong economy generally supports healthy corporate earnings, leading to increased investor confidence and potentially higher stock prices. Conversely, weak economic growth can dampen corporate profits and lead to lower stock valuations.
