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Psychological factors influencing stock market

Released at: 10:50, 27/08/2015

Psychological factors influencing stock market

Mr. Nguyen Duc Huong, Vice Chairman of LienVietPostBank, shares his thoughts on the impact of psychological factors on the stock market and the money market.

by Thu Hoang - Hoang Viet

What are your thoughts on the current exchange rate fluctuations?

State Bank of Vietnam (SBV) Governor Nguyen Van Binh stressed at the government meeting on the macro-economic situation on August 25 that Vietnam has significantly adjusted the VND exchange rate and that there is no reason to continue to devalue the VND any further.

On the same day he also met with leaders of commercial banks to direct them not to continue to adjust their exchange rates.

On August 24 the USD/VND exchange rate created tensions when banks raised the buying price. On August 25 some adopted a purchase price that was lower than the base price by VND7.

Exchange rate movements were foreseen by the SBV, who also issued clear directions. The market’s performance now also depends on market sentiment.

On the afternoon of August 24 there was much talk about the falling Chinese stock market. Global stocks also fell significantly, and local stock markets also saw some panic. The USD/VND exchange rate also influenced markets, especially in terms of psychology.

Psychological factors have affected the performance of the stock market and the money market many times in history, as market movements are closely related to the interests, assets, and wallets of many people and commercial banks.

■ Can you tell us more about the psychological factors that affect commercial banks’ decision making?

There are thoughts at commercial banks that the exchange rate should be increased again even though it’s been adjusted twice already. Commercial banks must also grasp market trends to shape their business decisions, within the legal framework.

Banks usually listen to customers and enterprises. For example, there are some businesses that have concerns about foreign currencies. They want to be active in securing foreign currency sources and focus on buying foreign currencies, even before their payments are due. This causes an increase in demand for foreign currencies. When customers have concerns banks must have foresight and concern as well.

At the recent meeting the SBV Governor emphasized that psychological factors exist at banks. He confirmed the stabilization of the exchange rate between now and the early months of next year, and that it is necessary for commercial banks to ignore psychological factors. This helps to reduce unnecessary tension in the stock market and money market and maintain stable development in general.

■ Are the current signs of stress in the market mainly caused by psychological factors?

Yes. Psychological factors are similar to a bubble, which is easily inflated, creating speculation, and false shortages in the forex market.

The balance of supply and demand in foreign currencies in the economy will not see much change over the final months of this year although the overall surplus is forecast to be less favorable compared with last year.

Any bubble will eventually collapse. The SBV has clear directions on stabilizing the market. Now we just need to wait for psychological bubble to disappear.

To stabilize the market there must be a range of measures, including overcoming these psychological factors.

■Can you tell us more about the SBV’s current orientations?

The adjustments made to the exchange rate and the trading band stemmed from the devaluation of the Chinese Renminbi and talk of the US Federal Reserve raising interest rates in September.

With the SBV’s adjustment on August 19 it also sent a clear message, that this move targets stabilizing the market and that the exchange rate will be maintained within a permitted margin from now until the end of this year and the early months of next year.

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