The factors that shape index prices depend largely on the assets they are made up of.

For example, stock market index prices fluctuate based on the share prices of the companies that comprise them. For commodity indices, commodity prices play a decisive role.

Economic News

Gross Domestic Product (GDP) data, which is released quarterly, as well as monthly data on industrial production and consumer prices, are strong drivers for stock and currency markets. Positive economic news from the United States, for example, can lead to an increase in the US Dollar Index (DXY).

Interest rates set by central banks such as the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) also influence the overall dynamics of stock and currency prices.

Loose monetary policy, which involves lower interest rates and aggressive asset purchases, tends to rallied the stock market and increased risk appetite, while higher interest rates tend to put pressure on stocks.

Company Financial Results

Companies listed on stock exchanges are required to publish their financial statements quarterly or semi-annually (depending on the exchange).

The period after the end of the quarter when companies announce their results is called earnings season. Stock market volatility tends to increase during earnings season as traders react to company financial results.

Company Announcements

Other company announcements, such as new products, mergers and acquisitions (M&A), and changes in senior management, can impact their stocks along with their earnings reports. This, in turn, can impact stock market indices.

Changes in index composition

Some stock market indices are regularly rebalanced to ensure that all constituent companies remain eligible for listing. For example, the S&P Dow Jones and MSCI indices are rebalanced quarterly or annually following a review by their index committees.

The index may be more volatile during rebalancing, but changes in composition are usually known in advance and are usually priced into the index.

Currency fluctuations

Changes in exchange rates affect both the stock market and the currency indices. Stock indices that focus on companies that generate a large proportion of their revenue overseas may be sensitive to currency exchange rates.

For example, the FTSE 100 (UK100) index includes companies that have benefited from the decline in the value of the British pound sterling (GBP) in recent years, as they receive a higher return when converting foreign currency sales revenue into pounds.

Geopolitical Events

Elections and other political events can impact stock and currency market performance. For example, the US presidential election impacts markets internationally as investors consider the impact of the new administration's policies on the world's largest economy.

The conflict between Russia and Ukraine has had a strong impact on markets due to Western sanctions on the former, as well as disruption to supply chains that has led to higher energy and food prices.

Investor Sentiment

Investor sentiment has a significant impact on the value of indices. For example, investors actively sold off indices at the beginning of the Covid-19 lockdown, as they expected a drop in demand that would cause an economic recession. After successful trials of anti-Covid vaccines, indices began to recover.

In 2022, stock indices have been significantly affected by growing concerns about the possibility of a new recession due to rising interest rates and high inflation.

Commodity Prices

Obviously, commodity indices depend on the prices of the commodities they track, whether they measure prices directly or track the stock prices of companies operating in the industry.

For example, shares of major oil and gas companies have risen in value as oil prices have risen. Accordingly, the indices that track them have risen in value. 

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