The following post was written by staff writer, Peter.
“Markets do very weird things because it reacts to how people behave, and sometimes people are a little screwy.” – Alan Greenspan
Have you ever wondered about the impact of the daily news is on the world’s financial markets. Surely the war in Syria, for example, should not have any effect on the price movements of the European and USA markets? What about the different financial markets? Do they influence each other? For example, if the Tokyo stock markets is down when it opens, will the later opening markets be influenced by the Tokyo market?
Daily news and the markets
Alan Greenspan, in his quotation above, makes a valid point about the current state of the global financial markets. Unfortunately, the daily news is a direct cause of significant market fluctuations. As soon as market investors do not like what is going in a particular part of the globe, they tend to withdraw their investments from companies associated with the event in question and put their funds into hedge funds; ergo, where their money will be protected. This will drive the affected stock markets down.
The opposite is also true. An excellent example is that of investing in third-world currencies. If the country linked to the currency is stable and growing vigorously, then investors will buy this currency, and the price will rise against currencies such as the USD and the EUR. On the other hand, as soon as a major event such as the firing of a trusted Finance minister, then investors rush to sell the currency, causing it to tank overnight.
The reality is that currently, the global geopolitical situation is very unstable. Investors can go to sleep tonight knowing that all is well with their investments, and they can wake up tomorrow morning to discover that the world has changed, and they have lost a lot of money overnight.
For example, South Africa is Africa’s largest economy, and it was seen as one of the most successful emerging market countries. Consequently, there was a lot of investor confidence in the country and the South African Rand was widely tipped to regain its strength in 2016. Unfortunately, in December 2015, the South African president, Jacob Zuma, decided to fire the successful and widely respected finance minister overnight. It was a shock move and caused the South African stock markets and economy to lose billions in the local currency. Foreign investors sold off the South African Rand that they held, causing it to dive sharply.
The end of this story is that after three days, a retired Finance minister, Pravin Gordhan was reinstated as the country’s top financial guru. The Rand started recovering its losses; however, on 30 March 2017, Zuma once again interfered with the Finance ministry by firing Gordhan and his deputy for an untried and inexperienced politician. Needless to say the Rand is once again in free-fall and who knows when it will stop.
Ethics and the financial markets
Ethical matters such as the issue of whether it is ethical to offer a tax credit or payment to organ donors will affect the financial markets. If the government determines that it is ethical to pay organ donors, then the number of organ donors will likely increase; thereby, reducing the waiting list for organs, and the impact on the USA fiscus. The financial markets love good news. Therefore, the news that the USA will not have to pay as much for medical treatment for people waiting for organ donations is likely to strengthen the US dollar.
The financial markets influence each other
The Finance.Zacks.com website explains the knock-on effect of the world’s financial markets directly and succinctly: “In a global economy, the financial fortunes of corporations and nations are tied together across international borders.” This is why the fortunes of markets that are open first on any given day have a direct impact on the later opening markets. In the same way, the markets that open last will influence the opening prices of the earlier markets first thing the next day.
The next important point to note is that the world’s largest economies affect the smaller economies. China is now the largest economy when measured by the quantity of goods and services produced by the Chinese people. Therefore, when the Chinese economy, and by extension, its financial markets, the world’s smaller economies and financial markets will feel the effects of this downturn.