How News Affects Share Prices

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By

Tony Luckett

Published in Investing on 1 August 2012

Good news or bad, more often than not there is a knock-on effect...

Whenever news emerges about a company, its products, its markets and even unrelated things like wars in distant countries, the stock market decides how this will affect the company's future earnings.

As the new information is assimilated, investors' collective opinion of the company's prospects will manifest itself in the form of a new share price. Now and again this happens in a peculiar way.

News affects other prices

Sometimes company-specific news will produce a knock-on effect on other companies' shares. This happened last Thursday when the world's second largest brewer SABMiller (LSE: SAB) reported better-than-expected sales growth in its first-quarter management statement, causing its shares to rise by 3.3% in half an hour.

Over the same period, shares in the world's largest distiller Diageo (LSE: DGE) rose by almost 2%, mostly because SAB's report told the market that alcohol sales in the emerging market nations are continuing to grow strongly. While Diageo doesn't have anything like the same presence in these countries, it still does a fair bit of business there. Consequently, the market marked up Diageo's shares on the SABMiller news.

So if anything new is released about the Libor scandal that is specific to Barclays (LSE: BARC), you can be pretty sure that it will influence the share prices of the other banks that are also believed to be involved, such as HSBC (LSE: HSBA).

Good news? Bad news? It doesn't matter

Very often news has little or no effect because it has already been priced into the shares. Sometimes you'll see a company produce a good set of results only for its share price to fall. When this happens, it's because the market was expecting even better results.

The way markets sometimes react in strange ways to news can seem a little bit disconcerting if you're a newcomer to the stock market. If you want to learn more about shares, but aren't quite sure where to start you might try downloading our special guide: "What Every New Investor Needs To Know"

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Bailout? That's last year's news

Last year, the news that Spain would probably need a bailout would have caused global stock markets to tumble. In 2012 the same news produced a collective "so what?", and the FTSE 100 (UKX) index fell by just over 1%.

The news didn't have too much effect because global financial markets seem to have become used to the eurozone's problems and some form of bailout was already built into prices.

But when Mario Draghi, President of the European Central Bank, said last week that it would do "whatever it takes" to support the euro, the fact that share and bond prices around the world rose sharply tells us that this was genuinely new news.

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> Tony owns shares in Diageo and SABMiller but he doesn't own shares in any of the other companies mentioned in this article.

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Comments

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tru2me 01 Aug 2012 , 11:29am

But when Mario Draghi, President of the European Central Bank, said last week that it would do "whatever it takes" to support the euro, the fact that share and bond prices around the world rose sharply tells us that this was genuinely new news.

Not so sure Tony?
Suspect the market is desperate to receive good Euro news and is clutching at this meaningless statement in the hope that it means something tangible because it has come out of the mouth of the President of the European Central Bank.

jongleur100 01 Aug 2012 , 12:06pm

I agree with ram - it's a mystery to me that markets reacted positively to Draghi's announcement. The ECB has no firepower of its own, European leaders disagree about giving it further ammo, and a Greek default (and then by contagion a Spanish one) can happen within weeks.

'Trust me, I'm a central banker.' No, I don't think so :-)

TonyTwoTimes 01 Aug 2012 , 12:29pm

The thing with Draghi's announcement is that being a central banker he is very careful about what he says in public. Had the same thing been said by a senior politician the markets would have ignored it.

Here's a link to his speech

http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html

His comment about high bond yields (Italy and Spain) hampering the money transmission system and that this comes within the ECB's mandate is a huge signal that there will be massive ECB purchases of Italian and Spanish bonds.

Which is why Italian and Spanish yields dropped sharply on the announcement.

Now it may be that he gets the rug pulled from underneath him, in which case the markets will fall back. But it seems that Angela Merkel supports him.

Cheers,

TonyL

ANuvver 01 Aug 2012 , 1:11pm

With you there, Tony. Politicians can waffle away, but it's very unusual for a central banker to be so forthright. These people know that what they say moves markets more than any warm fuzzy words from politicians, and have a professional obligation to bear that effect in mind.

If he speaks in such terms without something to back it up, not only does he damage his own credibility, but that of the office he holds. In fact, he would probably leave himself open to a charge of abuse of that office.

The Fed and the BoE will sit on their hands and emphasise that they're watching and standing ready, but the ECB will announce something - restarting the bond purchase programme, for instance. There will also be something about strengthened commitment for central banks and politicians to pull together.

Spain is not Greece - if that goes out of control, it's Italy next and that's the end of the eurozone in all but name.

ANuvver 01 Aug 2012 , 2:24pm

Of course, the theme for Friday could very well be "sell the news".

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