Posts filed under “Currency”
Given yesterday’s monster $66B Trade Deficit (see chart below), perhaps its time to look at some other factors that might be influencing both US and Foreign Markets.
Many people’s working assumption has been that markets outside the US were closely correlated to the US dollar. Indeed, up until the autumn of 1999, equity markets outside the U.S. loosely tracked moves in the dollar.
Since then, however, they have diverged from the buck, and instead tended to mirror the performance of the S&P 500.
This raises several questions, but the one that leaps to my mind first is if overseas markets are tracking the S&P500, then why should investors bother diversifying overseas? There are plenty of other good reasons to do so, but uncorrelated returns to US markets may no longer be one of them.
Michael Panzner notes that it comes down to several factors in no particular order:
1) more U.S. players (hedge funds, broker-dealers) are "exporting" the arbitrage and investment strategies that use in the domestic market to other parts of the world;
2) the growth of the internet and of 24/7 business/financial news coverage, especially over the past five years, means investors all over the world are immediately aware of new developments and market trends occurring elsewhere;
3) the heavier-weighted (i.e., largest cap) stocks in most mature markets tend to be multinationals (think Sony, BP, Deutsche Bank, HSBC, etc.) which trade more in line with each other than with domestic peers, sectors, or indices;
4) expanding global trade has caused some degree of convergence among many leading economies, as well as supply-and-demand patterns for goods such as oil;
5) correlations tend to increase in bear markets (of course, the market has been rallying since 2003, but sentiment-wise, one could argue that what we have now is unlike the bullish euphoria we saw in the last half of the 1990s).
I am sure there are more, but you get the idea.
Good round up from Dow Jones:
Over a week after making
landfall, the broad economic fallout from Hurricane Katrina continues to
unfold. Economists are downgrading their third quarter growth forecasts for
the U.S. economy and not all think that rebuilding in the wake of the storm
will bring things back in the fourth quarter. Markets have stabilized
however, taking their cue from the price of oil and other refined energy
products, which have been hit by a major international effort to release
emergency energy reserves in an attempt to alleviate a supply crunch.
Estimates of the economic loss from the hurricane exceed $100 billion, with
the Senate’s top Democrat putting it closer to $150 billion.
are some of the main market and economic impacts: