Whether you’re a trader or not, it’s no secret that all global financial markets are directly or indirectly interconnected. This is due to the globalisation of commerce as well as ease of access to financial markets
which allows for copy trading to thrive as people look for the best stocks to provide a large return on investment.
Whilst these markets may not have a direct link, small disruptions can ripple across all markets which may lead to large risk events that can impact all economies around the world. The interconnectedness isn’t always apparent until something like this occurs.
Understanding the interconnectedness of the world’s market can help you develop a greater trading strategy as you learn how different markets around the world can impact your investments. This may help you remain in the small percentage of traders that are successful. Read on to learn more.
The global markets
No company wants its growth to remain stagnant, especially when there are plenty of opportunities to move to an international market that can skyrocket its value and customer base further.
This globalisation means that multinational companies can now offer globally standardised products that are advanced and reliable whilst being low priced. It is believed that global companies are the only ones that can have long-term success which is why markets are now on a global scale.
How different markets respond to one another
So, with the world’s markets so interconnected, how do different markets respond to each other? Here are some examples:
Bond prices and interest rates
These have an inverse correlation which means that when one is high the other is low. In this case, high interest rates drive down the value of bond prices.
Stocks and Inflation
As previously mentioned, rising inflation decreases the value of bonds which allows stocks to drive forward. However, this will continue for a short while but the stocks will eventually fall off.
Why are the markets so interconnected?
With around 12% of markets being globally interconnected, you may be wondering why exactly this is. Some possible explanations include:
- Trade has grown more proportionally than with GDP
- Trade is a fundamental part of all economic activity around the world
- Trade generates efficiency gains in markets
- The openness of trade around the world allows for more markets to connect with each other
As you can see, the many markets around the world are all interconnected in some way or another. This may have a small or large impact on your trading strategy and proves how critical doing your research on different markets that may have a direct link to your investment is.