Blog / Global Trading / Investment landscape changes:
Global Trading / Investment landscape changes:
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:
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.