Current Financial Market Events and Their Implications - Research Paper Example

Implications of Financial Market Events (Name) (Institution) Contents Contents 2 Abstract 4 The last years of the last decade have recorded significant changes in the global financial markets. To begin with, the global economic crisis led to many countries to have outstanding debts. Countries in the Asian continent were affected the most, in terms of their financial markets. The factors that affect stock prices range from internal developments, world events, inflation and interest rates and exchange rates. Internal developments are events that occur within companies including mergers and acquisitions, earnings reports, the suspension of dividends, the development or approval of a new innovative product, the hiring or firing of company executives and allegations of fraud or negligence. World events such as war and civil unrest, natural disasters and terrorism can influence stock prices directly or indirectly. For instance, the terrorist attacks on September 11, 2001, affected markets directly, as they caused many investors in the United States to trade less and to focus on stocks and bonds with less risk (Wolski, 2012). When countries announce a new military venture in response to the outbreak of civil unrest or conflict abroad, there is always an indirect effect on the price of stocks. 5 Scope and Purpose of the Study 6 Literature Review 6 Methodology 6 Findings 7 Eurozone in Deflation Unless ECB Acts: Economist 7 Forget Bernanke, Bottom-Fish for these Currencies 8 Asian, European Stocks Briefly up on China PMI 10 Forget Bernanke, Bottom-Fish for these Currencies 12 Asian, European Stocks Briefly up on China PMI 14 When a region’s stock value goes up, compared to other regions, there are various economic effects on financial markets. First, there are stable sales. Companies that operate in the region whose stocks are performing excellently are assured to sell their commodities because of the perceived superior performance. Investors who have stocks in such companies are assured of stable returns. This is because company shares perform outstandingly in the financial markets. When company shares portray a superior performance on the stick exchange, such a company is expected to pay a stable and high dividend. Thirdly, the earnings for labourers who work in such companies whose stocks perform well in the financial markets because of the region’s excellent performance are deemed to be high. Companies that perform better in the stock exchange pay their workers well to maintaining an outstanding productivity, leading to maintenance of the superior price of stocks in the stock market. Finally, there are always increased home investments in the banking sector. This is associated with the perceived expected return on investments. Since most investors are assured of a profitable return, local investors of the banking sector will inject more investments in that sector. Investors are not exposed to foreign exchange risk. Superior financial market performance means less risk (Rugman, 1997). 14 Conclusion 14 References 16 Appendix 19 Abstract Stock markets, across the world, can be volatile, and the reasons why some stocks rise and fall can are extremely complex. In most cases, stock prices are influenced by a number of factors and events; some of which influence stock prices directly and others that influence stock prices indirectly (Wolski, 2012). For instance, if a country announces that it will commence a war against another country, that announcement is likely to cause the price of the stocks of military equipment and weapons manufacturers to rise due to an expected increase in defence contracts. In turn, this can raise the value of stocks for companies that supply military equipment parts and technology. This would raise the demand for, and price of, natural resources used to make these parts, which would raise the price of stocks representing particular mining and natural resource processing companies. Investors should remember, when investing that there is a company behind every stock and a reason why some companies and their stocks perform the way they do. This study seeks to analyse the most significant events on the world financial markets and their implication on the stock markets. The study delves in the events that posed major implication on the Asian countries’ stock markets. Introduction The last years of the last decade have recorded significant changes in the global financial markets. To begin with, the global economic crisis led to many countries to have outstanding debts. Countries in the Asian continent were affected the most, in terms of their financial markets. The factors that affect stock prices range from internal developments, world events, inflation and interest rates and exchange rates. Internal developments are events that occur within companies including mergers and acquisitions, earnings reports, the suspension of dividends, the development or approval of a new innovative product, the hiring or firing of company executives and allegations of fraud or negligence. World events such as war and civil unrest, natural disasters and terrorism can influence stock prices directly or indirectly. For instance, the terrorist attacks on September 11, 2001, affected markets directly, as they caused many investors in the United States to trade less and to focus on stocks and bonds with less risk (Wolski, 2012). When countries announce a new military venture in response to the outbreak of civil unrest or conflict abroad, there is always an indirect effect on the price of stocks. The stock market is also affected by periodic adjustments of interest rates to combat inflation. When interest rates are raised, many investors sell or trade their higher risk stocks for government backed securities such as bonds to take advantage of the higher interest rates they yield and to ensure that their investments are protected. Foreign currency rates have a direct impact on the price and value of stocks in foreign countries, and changes in exchange rates rise or fall leading to a decrease or increase in the cost of doing business in a country, which will affect the price of stocks of companies doing business abroad. Stocks and the stock market also can be affected by the release of new products or services. Internet blogs, press releases and news reports can build high expectations for the performance of companies, which will raise the price of their stocks (Wolski, 2012). Scope and Purpose of the Study This study seeks to analyse the most significant events on the world financial markets and their implication on the stock markets. The study delves in the events that posed major implication on the Asian countries’ stock markets. The study then links these significant events, on financial markets to economic theories to provide a detailed analysis. Literature Review Asia was not directly or significantly hurt, via financial channels by the global financial crisis, but it was hurt through trade channels (Global Policy Journal, 2012). Current regulatory reforms of global financial markets affected Asian finance markets in various ways. The current crisis has exposed many weaknesses in the existing financial structural design, including the fragmentation of regulatory jurisdiction at the national and institutional levels. The globalisation of finance and its fragmented regulatory oversight is a collective action problem that slips into a tragedy of the common investors. Given that there is no agreement of views on how finance should be structured; there are differences in approaches to the reforms. Because Asian financial institutions and structures are less complicated, Asia was enormously affected by the events that took place, affecting financial markets. Methodology This study will collect information using secondary sources, from various blogs that have frequent financial event reporting forums. The information will be derived from blogs and electronic sources such as The Word Bank Reports, financial events calendar blogs of Asia and journals that provide investor information. The befits of using this secondary sources of data is that this information is reliable because it ha been recorded and compiled by financial experts who in addition to excellent collection and presentation of financial information, have interpreted such information to give reliable reports concerning the implications of such financial market events. The study uses qualitative methods of data collection and analysis. Qualitative methods are essential because they provide a more in depth and rich description because of their high levels of validity (Rubin & Babbie, 2010). Findings August 29 Eurozone in Deflation Unless ECB Acts: Economist The Eurozone is likely to face deflation, and the ECB uses its mandate to buy bonds, an economist said. The European Central Bank is ignoring signs of deflationary pressures in the Eurozone. By the EBC refusing to ease monetary policy, further, it pushes the area into a slow growth circumstance. Central and Eastern European economies are the most vulnerable as they risk getting drawn into the single currency area’s woes. Money supply is measure of cash in the Eurozone economy that includes cash in circulation and overnight deposits, deposits with a maturity of two years and redeemable deposits at a notice of up to three months (Oprita, 2012). Also, money market fund shares and units and debt securities with a maturity of two years are included. There are hopes in the market that the ECB will come up with some interventions to push down Portuguese, Spanish, Irish and Italian bond yields. It is expected that the bond yields will be capped at a certain level. However, this may not help much. August 31 Forget Bernanke, Bottom-Fish for these Currencies Normally, a monetary policy by itself may not achieve what a balanced set of economic policies might achieve. It cannot neutralize the fiscal and financial risks that a country faces. It cannot lead to the purchasing of assets such as government bonds by the government to boost liquidity. The labour market has only seen signs of weak growth since the global financial crisis struck in 2007/2008. Market participants and the Federal Reserve have acted to support economic growth and foster job creation, in the last five years. It is imperative to achieve further progress. Therefore, taking into account of the uncertainties and limits of its policy tools, the Federal Reserve will offer further policy accommodation as needed to promote a stronger economic recovery and a sustained improvement in labour market conditions in a context of price stability. The rally, witnessed earlier this month, was primarily driven by more investor optimism about the potential policy response coming from the G10 authorities, in Europe (Oprita, 2012). With expectations rising quite dramatically, investors appear to have taken off some of their bets, reflecting concerns about the possible frustration. September 17 Emerging Markets Currencies Winners after QE3 Most Asian currencies performed outstandingly in the stock markets. The Indian rupee outperformed the currencies of other countries in the region by a large margin, strengthening by 2.5 percent since last Wednesday. This was also, buoyed by the Indian government’s launching of crucial investment reforms in the retail and airline sectors. On the other hand, the Indonesian rupee gained 1.29 percent. The Israeli shekel should continue to catch up as long as the regional security situation does not deteriorate (Emerging Markets, 2012). Currencies like the Indonesian rupee or the South Korean won will continue to perform in the period ahead. October 10 Emerging Markets Rally Hinges on China Global emerging market securities rallies appeared to reach the peak in September. “It’s all investors hope that China’s leaders will find a way to boost economic growth at home while opening up the country’s vast internal markets to greater external financial investment. China should open up its capital markets to foreign investment make emerging markets continue their rally. Investors are also waiting for signs of life in China’s stock markets, which have underperformed across the developed and emerging worlds, over the past several months (Wilson, 2012). The Shanghai Composite has dropped in value all through the summer, sliding 14 percent in the last five months. It is expected that emerging markets will remain influenced by external forces. Financial markets experts believe that these monetary easing measures that have tempered market conditions, in the developed world are the principal reasons behind the recent surge in emerging market valuations. The US fiscal cliff will make people risk averse. This will cause them to sell emerging market stocks, and come back when they realise the fiscal cliff is not as bad as everyone thought. The Chinese election is another catalyst. October 11 Asian Savings Must Stay at Home: Bankers Principal Asian bankers and financial legislators called for the formation of a single financial policy for the continent, complaining that the savings surplus in Asian markets was being invested in other places like the US and Europe. The single financial platform would include clearing platforms, multinational credit ratings agencies and banking institutions. There is a need for Asian nations working better together. Lack of pan Asian asset management, and the lack of trust between Asian nations, is endangering enhanced regional financial integration. Stakeholders also called for the creation of a pan regional stock exchange and a clear need to develop a strong Asian capital markets system in the region and to ensure that Asian savings are recycled back into regional projects (Wilson, 2012). The process has to be driven by governments, followed by the private sector. Disputes need to be solved amicably in Asia, particularly in the north east of the region in order for Asia to have a chance to project its own economic vision to the world. October 24 Asian, European Stocks Briefly up on China PMI China’s output contraction slowed in October, pushing the Flash Manufacturing PMI to 49.1, which is still below the 50 level that separates contraction from expansion. This figure, however, is well above September’s 47.9 (Emerging Markets, 2012). Manufacturing productivity rose to 48.4 in October from September’s 47.3 (see appendix). European stock markets opened, which also pushed up Chinese shares. New orders and new export orders contracted at a slower rate, and so did stocks of purchases and quantity of purchases. Chinese employment and backlogs of job both contracted at a faster rate while stocks of goods, which had been rising, shrank. Output and input prices both increased, causing fears of inflation further down. However, external challenges still exist, and the pressures on the job markets are lingering. Therefore, there should be a continuation of policy easing in the future to secure a solid growth recovery. Economic Impacts of Financial Markets Events Eurozone in Deflation Unless ECB Acts: Economist Deflation causes depression hence monetary non neutrality. This causes bank panics in the countries involved. Bank panics, in turn, interfere with normal flows of credit, which may affect the performance of the real economy. Another effect is falling prices on the financial sector, called debt deflation (Hubbard, 1991). This happens through increasing of the real value of nominal debts and promoting insolvency among debtors. The overall effect is financial distress whereby the incentives of borrowers are distorted making it hard for them to extend new credit. Deflation raises the prices of marketable securities. For instance, deflation raised the prices of railroad bonds in the United States of America (Burdekin, 2004). This increased wealth for existing bondholders, but then decreased the interest rate on bonds purchased by new investors. Investors normally substitute money holding for lending on financial markets. The financial markets are unable to channel the savings into investments. The prices of stocks in financial markets decrease drastically (Muljad, 2009). Asian Savings Must Stay at Home: Bankers Investors opt to invest in foreign countries because they expect that economic conditions will be extremely favourable in the particular foreign country. Therefore, they invest stocks of the firms in that country. Secondly, investors consider having their investments in stocks of the currencies that they expect will strengthen over time because that would enhance the return on their investment. Others invest in stocks of other countries as a means of diversifying their portfolios. This makes investments less sensitive to possible adverse market conditions in their home country (Madura, 2011). The effects of investing in foreign countries include the investments that the home country is denied. This means that the existing local firms may not be able to pay higher wages to their workers. This will, in turn, lead to low productivity, and the end result is low prices of shares in the financial markets (Thomas, 2009). This is true for Asian countries such as China whose investors have decided to invest in foreign countries. It should be noted that Foreign Direct Investments benefit the host country while the home country of the investors loses in terms of investments. Emerging Markets Currencies Winners after QE3 When currencies of a nation perform better in the stock exchange market, it is suggestive that such a country’s currency has stabilised. This means that investors will seek to invest more in such a country’s currency. More investments in a country’s currency imply superior performance in the financial markets. The Asian financial crisis caused a lot of turmoil on Asian countries’ currencies, but due to the recent better performance of currencies, financial markets are stabilizing again. Chinese foreign economists and policy makers have been looking for ways of ensuring that the Chinese RMB remains stable (Wei, 1999). The overall effect is that the exchange rates appreciate, which may indirectly lead to higher wages paid to the workers working in the companies based in such countries. Forget Bernanke, Bottom-Fish for these Currencies Monetary policies have various effects on financial markets. This is evident especially when the policies are transparent and accountable. The principal effect that this has on financial markets is that it reduces policy uncertainty. This can have a positive impact on the accuracy of the private sector financial forecasts (Arora, 2007). In turn, greater forecast accuracy allows private agents to take a longer term view of economic decisions than they could do. This strengthens the basis for investment and employment creation. There are accurate interest rate forecasts and inflation trends and forecasts for banks. For instance, China needs a transparent monetary policy that ensures a stable, non inflationary growth. Issues such as increased integration can pose great vulnerability to external shocks, and a sound monetary policy is an appropriate defence against such shocks. In the recent years, China’s monetary policy operated under difficult constraints, including a fixed exchange rate regime, an underdeveloped financial system and numerous institutional weaknesses (Hammond, Kanbur, & Prasad, 2009). Banks depend on the monetary policies as they seek to control the flow of credit in the financial markets, which highly determines the stock prices and level of investments. A monetary policy determines asset prices, which in turn have an impact on the prices in the financial markets because they determine the level of investments (Susai & Uchida, 2011). Asian, European Stocks Briefly up on China PMI When a region’s stock value goes up, compared to other regions, there are various economic effects on financial markets. First, there are stable sales. Companies that operate in the region whose stocks are performing excellently are assured to sell their commodities because of the perceived superior performance. Investors who have stocks in such companies are assured of stable returns. This is because company shares perform outstandingly in the financial markets. When company shares portray a superior performance on the stick exchange, such a company is expected to pay a stable and high dividend. Thirdly, the earnings for labourers who work in such companies whose stocks perform well in the financial markets because of the region’s excellent performance are deemed to be high. Companies that perform better in the stock exchange pay their workers well to maintaining an outstanding productivity, leading to maintenance of the superior price of stocks in the stock market. Finally, there are always increased home investments in the banking sector. This is associated with the perceived expected return on investments. Since most investors are assured of a profitable return, local investors of the banking sector will inject more investments in that sector. Investors are not exposed to foreign exchange risk. Superior financial market performance means less risk (Rugman, 1997). Conclusion Political events, world events and other events have significant impacts on financial markets. This is because the events have both macroeconomic and microeconomic implications on the performance of stocks in the financial markets. The effects are either direct or indirect. Currency performance, monetary policies and fiscal policies are among the factors that affect how a region’s stocks perform in the financial markets. This also affects the rates of return expected by investors, earnings anticipated by workers and the volume of sales and profits that companies in particular countries or regions expect to make. Stable stock performance ensures stability in the performance of any investments. Therefore, recent world events outlined above have had major impacts on portfolio performances. As a matter of main concern, Asia needs to strengthen domestic capital markets to match international standards. The Asian approach will tend to be more pragmatic, focusing on simpler rules more effectively enforced (Global Policy Journal, 2012). . Governments should encourage financial innovation with an emphasis on functionality for the real sector, rather than leverage for the financial system. They should build financial markets on a modular basis, ensuring that failure of one module will not destroy the whole system. Since it is recognised that international problems cannot be solved at national levels alone, Asia can increase its voice in the international arena through regional financial organisations to help push implementation and enforcement according to global standards and to have regional input into global policy decisions. References Arora, V. B. (2007). Monetary Policy Transparency and Financial Market Forecasts in South Africa. Washington, D.C : International Monetary Fund Press. Burdekin, R. C. (2004). Deflation: Current and Historical Perspectives. Cambridge: Cambridge University Press. Hammond, G., Kanbur, R., & Prasad, E. (2009). Monetary Policy Frameworks for Emerging Markets. West Port: Edward Elgar Press. Emerging Markets. (2012, October 24). Asian, European Stocks briefly up on China PMI. Retrieved October 31, 2012, from http://www.emergingmarkets.org/Article/3107555/News/Asian-European-stocks-briefly-up-on-China-PMI.html Emerging Markets. (2012, September 17). Emerging Markets Currencies Winners after QE3. Retrieved October 31, 2012, from HYPERLINK "http://www.emergingmarkets" http://www.emergingmarkets .org/Article/3090051/News/Emerging-markets-currencies-winners-after-QE3.html Global Policy Journal. (2012). The Regulatory Reform of Global Financial Markets: An Asian Regulator's Perspective. Retrieved October 30, 2012, from http://www.globalpolicyjournal.com/articles/world-economy-trade-and-finance/regulatory-reform-global-financial-markets-asian-regulators Hubbard, R. G. (1991). Financial Markets and Financial Crises. Chicago: University of Chicago Press. Madura, J. (2011). International Financial Management. Mason: South-Western Cengage Learning Press. Markit. (2012, September 29). China Manufacturing PMI. Retrieved October 31, 2012, from http://www.markit.com/assets/en/docs/commentary/markit-economics/2012/oct/CN_Manufacturing_ENG_1210_PR.pdf Markit. (2012, August 31). Markit/JMMA Japan Manufacturing PMI. Retrieved October 31, 2012, from http://www.markit.com/assets/en/docs/commentary/markit-economics/2012/sep/JP_Manufacturing_ENG_1209_PR.pdf Muljad, P. (2009). Economics and Banking. New York: Routledge Publishers. Oprita, A. (2012, August 29). Eurozone in Deflation Unless ECB Acts: Economist. Retrieved October 31, 2012, from http://www.emergingmarkets.org/Article/3081795/News/Eurozone-in-deflation-unless-ECB-acts-economist.html Oprita, A. (2012, August 31). Forget Bernanke, Bottom-Fish for these Currencies. Retrieved October 31, 2012, from http://www.emergingmarkets.org/Article/3083398/News/Forget-Bernanke-bottom-fish-for-these-currencies.html Rubin, A., & Babbie, E. R. (2010). Essential Research Methods for Social Work. Belmont : Cengage Learning Press. Rugman, A. M. (1997). The Theory of Multinational Enterprises: The Selected Scientific Papers of Alan M. Rugman. Brookfield: Edward Elgar Press. Susai, M., & Uchida, S. (2011). Studies on Financial Markets in East Asia. Hackensack: World Scientific Press. Thomas, L. B. (2009). Money, Banking, and Financial Markets. Mason: South-Western. Wei, F. (1999). China's Financial Sector Reform in the Transition to a Market Economy: Key Issues and Policy Options. Münster: Lit Press. Wilson, E. (2012, October 11). Asian Savings Must Stay at Home: Bankers. Retrieved October 31, 2012, from http://www.emergingmarkets.org/Article/3101181/News/Asian-savings-must-stay-at-home-bankers.html Wilson, E. (2012, October 10). Emerging Markets Rally Hinges on China. Retrieved October 31, 2012, from http://www.emergingmarkets.org/Article/3100662/News/Emerging-markets-rally-hinges-on-China.html Wolski, C. (2012). Five Factors or Events that Affect the Stock Market. Retrieved October 30, 2012, from http://smallbusiness.chron.com/five-factors-events-affect-stock-market-3384.html Appendix Appendix 1: China Manufacturing PMI Purchasing Manager’s Index Source: (Markit, 2012) Appendix 2: China GDP Growth Source: (Markit, 2012) Read More