When the news of a potential bailout in regards to the European debt crisis emerged, U.S. markets rallied hard. The Dow Jones Industrial Average rose by over 300 points (2.7 percent) and the Nasdaq increased by about 3.5 percent. As you can see by this, Europe’s problem economy spells out problems for the rest of the world as well. In the U.S., even the rumor of a successful bailout can reverse a sinking stock market in a sudden fashion.
When the world economy is growing, stock markets around the world flourish. But a problem with one major nation can, in converse, affect the rest of the world in a negative way. This is what is currently happening in Europe—the world’s economy has been performing poorly over the last several weeks since there was a very real potential for loans to be defaulted.
This coordination goes beyond just the stock markets and Forex Markets. The Euro has recently rallied against the U.S. dollar—even though the bailout has not yet occurred. People who think that Europe’s economic situation is close to bottoming out, and thus ready to rebound, are exchanging their dollars for Euros as they think that the price for the Euro will soon increase. In this respect, it should be very clear that markets are highly driven by psychology, as well as your typical fundamental and technical analysis methods. Having a firm grasp on market psychology and the results that this can have on prices will allow you to benefit while many others fail.