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Blog / Global Trading / Investment landscape changes:

Global Trading / Investment landscape changes:

2010/10/17. - 10:44

In the “Learning Center”  material we stated that the current  implementation of the predictor system is  not taking into account  the  financial  or stock markets outside of the US to  make the final computation.

 

It must be handled separately, taken into account by the  market player.

One reason  of this is the  extremely  complex  global  investment landscape, impacted by government politics and  many other factors, which is very hard to quantify, in addition to the fact that   the whole impact changes very dynamically.

 

The population of Earth was less than 1 billion  about 100 years ago.

 

Today it is over 6 billion,  and  there is a tough competitive rage for the  resources of the planet. (Oil, other non-renewable resources, energy, food,  water, metal, especially precious metals…) 

The other major reason of this rage is that  the  world financial system is  broken,  the people do not trust  governments and  fiat money  to help them  store  the value of their  savings any more.

 

We are witnessing tectonic shifts in the global  economic landscape,  changes, that will  rearrange the   weights of  many countries, whether we like it or not.

The  most important drive  of these changes is the US, and the BRIC countries (Chine, India, Russia and Brazil),  as the BRIC  forces the developed world to readjust  their life to accommodate the needs of those  emerging  markets.

 

Their argument is pretty simple and compelling: It is not fair  that  less than 5% of the word population consumes more than 50% of the resources,  while others probably working even harder,  can’t enjoy the  benefits of the planet as much as they would like to.

 

The governments  of the  BRIC countries made it clear,  that they would like to have their impact  increased in the forums of  world economic decision makers.

 

It is also  obvious, that they  got very disappointed  in the US political leadership and  about the future of the US dollar.  So they  openly following a strategy  which will help them  in the  decoupling  from the current dependencies to the western economic world leadership, by strengthening  economic  ties between BRIC members.

 

The  US stock market participants  might quickly conclude, that because  the importance of the  western economies  decreases,  the developments in China, India, Russia and Brazil  have a crucial  impact  on Wall Street developments.

 

To investigate  the interdependencies of some important world markets, we do not  even need to go outside of the US stock markets.

There are many   Global ETF – s currently traded on US exchanges, and those ETF-s  mirroring the performance  of  the stock market of  foreign economies.

 

The  ETF Symbols, that we used in our study:

            - US:  S&P500:  $SPX

-          Australia:  EWA

-          Japan:  EWJ

-          South Korea:  EWY

-          China: FXI

-          S&P Europe 350:  IEV

-          Brazil: EWZ

-          Russia: RSX

-          India: INP

 

We  studied the correlation  of these  indices Before the US  recession period (January 2003 till December 2007)  and after the start of the US recession (From 2007 December till 2010 October)

The two  exceptions are  INP, following the Indian market index and RSX, following the Russian index. These two  symbols were not traded from the beginning of our test period, so we  examined them only after the start of the US  recession.

 

The correlation of these ETF-s to the  US  economy – mirroring  S&P500 index  shows us  some very interesting  dynamics  in the following table:

 

Word_Correlation_Matrx_Oct_2010

 

 

Note, that when we calculated the Correlation, we used the Daily percentage changes in the above mentioned ETF-s and  the  S&P500 index.

 

Some  of the important conclusions and  considerations:

 

-          Before the beginning of the US recession, all world markets had relatively lower dependency  from the US markets, excluding the European  S&P350 index, which  correlated pretty well even  before the crisis.

 

-          Since the beginning of the recession  the correlation increased,  in some cases (Like Australia)  increased considerably,  and currently   have a relatively high  value, even though  the BRIC would like to decouple,  the US crisis gripping them all. though  the performance of  the  Asian markets  are better, in some cases much better than the performance of the US market (For example  Korean index moved up  about  20%, while the S&P500 moved up only about 10% recently) the direction of the movements are  often in synch.

 

-          The present correlation between the S&P Europe 350 and the US S&P500 is the highest, it is almost  frighteningly high.  The 0.92 correlation  means  for the trader, that every time, when the European index  up / down  more than a little (For example in  the green or in the red  0.5%)  than  the US market will be Up / Down  the same day  with a roughly  70% probability just based on these correlations.

It is almost assuring, that in case Either Europe or US slips back into recession, than  the other will follow  pretty soon.

 

-          Contrary to  certain common belief,  this data suggest, that Wall Street Today exert more  impact  over the word  economy   than it did 3 years ago, before the financial crisis started.

 

-          The least correlated market currently is India, but its index still have a relatively high correlation.

            -          Diversification between international stock markets will 

                  not work very well during  this highly correlated period.

-          Globalization and growing  international trade volume during the past 20 - 30 years  increased the interdependencies of the  international markets. It is good and could be really fruitful,  if the population of the world can enjoy piece.

      But  if  piece would be disrupted  by potential  economic or financial breakdowns or wars, than the consequences could  affect  the whole world population. This also means that the responsibilities of major economic powers and decision makers increased.

 

   

                      Enjoy Your Trading.

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