In the previous sections I have described the most important macroeconomic publications. Investors follow them very carefully since their announcements usually affect financial markets. Please note that they do not affect only one but many financial markets. Many markets are dependent on each other and how one market moves can affect the performance of another. Stock indices, currencies, and commodities are somehow related to each other in different ways. Markets are positively correlated when increases on one market are followed by increases on another one. They are negatively correlated when increases on one market are followed by decreases on another market. Below are listed examples of market correlations:
Indices – Indices
Indices – Currencies
Indices – Commodities
Currencies – Commodities
Indices – Stocks
Commodities – Stocks
Stocks – Stocks
In the next couple of chapters I will describe the most commonly know market correlations. Today, I want to start describing how indices worldwide are related to each other, mainly to US stock markets. Please take a look at both graphs below:
Graph 1
Graph 2
Graph 1 shows the performance of the Dow Jones Industrial Average while Graph 2 represents the Japanese major stock index, the Nikkei 225 in the last month. Please note the similarity of both graphs. United States are the biggest economy in the world with their GDP being around 30% of world’s GDP. We can say that the American economy is representative. That is why the performance of US indices affects major indices around the world. Obviously in this example we have to note that Asia is US’s biggest exporter that is why the correlation of the US and Japanese market is so strongly positive. We can expect that when stocks in USA are performing well, so will stocks in Asia and other parts of the world. Much depends on the region of the world. Emerging countries market’s will follow US indices, but stronger.
Summarizing, the performance of stock markets of the biggest economies in the world affects the equities markets of other. The US is the biggest economy in the world that is why investors’ mood depends so much on the results of American stocks.
Feel free to contact me with any question or comments.
Adam Narczewski
X-Trade Brokers Dom Maklerski S.A.
adam.narczewski@xtb.pl