Markets

Practice

Answer out loud first, then check. Mark each card; the ones to review come back first next time.

1. What is happening in markets at the moment?

   Have a two-minute answer ready that you update every day. Lead with the one or two stories driving markets, then give the moves that show it: an equity index, the 10-year government bond yield, the dollar, oil and, if relevant, credit spreads, each with the level and the direction. Finish with what you are watching next, such as a central bank meeting or a data release, and what it would change.

   The structure matters more than the number of facts. Use the daily notes and Interview Prep to keep the figures current.

   Likely follow-up: What would change your view?

2. How do interest rates affect equity valuations?

   A share is worth the present value of its future cash flows, so a higher discount rate lowers its value, all else equal. Rates also affect earnings: higher borrowing costs weigh on indebted companies and on demand, while banks can earn wider margins. The effect is strongest for companies whose value lies far in the future, such as high-growth technology firms, because their cash flows are discounted over more years.

   Likely follow-up: Why might equities rise when rates rise?

3. Why are growth stocks more sensitive to rates than value stocks?

   Their cash flows sit further in the future, so they behave like long-duration bonds: a change in the discount rate moves their present value more. Value stocks tend to earn more of their value from current cash flows and dividends, and include sectors such as banks and energy that can benefit when rates rise with growth or inflation.

   Likely follow-up: Which equity sectors are most like bonds?

4. What is the relationship between the dollar and commodities?

   Most commodities are priced in dollars, so when the dollar strengthens they become more expensive for buyers paying in other currencies, demand softens and prices tend to fall. A strong dollar also often reflects tighter US monetary conditions or risk aversion, which weigh on commodities too. The link breaks when the cause is a supply shock, such as an oil disruption, where both can rise.

   Likely follow-up: How does this affect commodity-exporting countries' currencies?

5. What moves exchange rates?

   In the short run, mainly interest rate differentials and expectations for central bank policy: higher expected rates attract capital. Over longer periods, growth, inflation, trade and current account balances, and terms of trade matter. Risk appetite matters throughout: in stress, money tends to flow to the dollar, yen and Swiss franc. Flows from trade, investment and hedging can dominate on any given day.

   Likely follow-up: What is a carry trade, and what makes it unwind?

6. What drives the price of oil?

   Supply and demand, and what is in storage. On supply: producer output decisions, including those of the OPEC+ group, production elsewhere and disruptions. On demand: global growth, especially in large importers, and seasonal patterns. Inventories show whether the market is tight or loose. The dollar, positioning and geopolitical risk move prices in the short run.

   Likely follow-up: What does the shape of the futures curve tell you?

7. What do credit spreads tell you?

   A credit spread is the extra yield a company's bond pays over a government bond of similar maturity. It compensates for the risk of default and for weaker liquidity. Spreads widen when investors worry about the economy or a company's balance sheet and narrow when risk appetite is strong, so they are a useful gauge of stress that often moves before equities react.

   Likely follow-up: Why might spreads widen while government yields fall?

8. Pitch me a trade.

   State the trade in a sentence: what you would buy or sell and in what instrument. Then the thesis in two or three points, the catalyst and its timing, and why the market has not priced it yet. Give the entry, the target and the stop, so the risk to reward is clear, then what would make you wrong.

   Keep it to something you know well and can defend for three follow-ups. Have the current level of the instrument ready: it is the first thing you will be asked.

   Likely follow-up: Why that instrument rather than an alternative?

9. What do you read to follow markets?

   Name sources you actually read and say how you use them: a daily financial newspaper, a morning summary of what moved overnight, central bank statements and minutes, and the main economic releases on their days. Then give an example of something you read recently and what you took from it. The interviewer is testing habit and judgement, not the list.

   Likely follow-up: Tell me about an article that changed your mind.

10. Stocks and government bonds both fell today. What could explain it?

    The usual negative correlation breaks when the shock is about inflation or rates rather than growth. A strong inflation figure, a hawkish central bank or heavy government borrowing pushes yields up, which lowers bond prices and also lowers the present value of equities. In a growth scare, by contrast, bonds rally while stocks fall. So look at what the news was and whether the yield rise came from real yields or from inflation expectations.

    Likely follow-up: What does that mean for a 60/40 portfolio?

11. What is the VIX, and what does it tell you?

    It is an index of the 30-day volatility implied by options on the S&P 500. It rises when investors pay more for protection, so it usually jumps when equities fall sharply. It measures expected volatility, not direction, and it tends to revert towards its long-run average after spikes.

    Likely follow-up: Why does implied volatility usually exceed realised volatility?

12. The central bank surprises with a larger rate rise than expected. How do markets react?

    Short-dated government yields rise most, because they track policy expectations, so the yield curve usually flattens. The currency tends to strengthen. Equities usually fall, led by rate-sensitive and long-duration sectors, while banks may hold up better. Credit spreads may widen. Over time, longer yields could even fall if markets read the move as reducing inflation and growth.

    Likely follow-up: What if the market had expected the larger rise?

13. What drives gold?

    Gold pays no income, so its opportunity cost is the real yield on safe assets: when real yields fall, gold tends to rise. A weaker dollar usually helps. It is also bought as a hedge against crises, currency debasement and geopolitical risk, and demand from central banks and jewellery matters. The relationships hold most of the time, but not always.

    Likely follow-up: Why can gold rise even when real yields rise?