Business Options; Relationships in the Global Financial Markets

Manila Bulletin, March 13, 2007 | Go to article overview

Business Options; Relationships in the Global Financial Markets


Byline: Valentin A. Araneta

The recent downward movement or correction in the stock or equities markets around the world illustrate how closely related the financial markets around the world are. The different country financial markets are converging into one global market as innovations in information and communications technology are applied to the world of finance and the sophistication and knowledge of investors, financial institutions and issuers of capital market instruments grow at geometric rate. There are great benefits albeit great challenges to this development.

Downward Correction Prompted by the Shanghai Stock Market

Two weeks ago, the stock market in Shanghai, China corrected downwards by 9 percent in one day. This triggered similar downward adjustments in the stock markets around the world. The Philippine stock market was not spared. There are key insights that may be discerned from the way the global financial markets operate based upon what has occurred.

Closer Links among Different Regional and Country Financial Markets

It is apparent that what occurs in country's stock market can directly affect stock market movements in other stock markets. The fact that the downward correction started in China indicates three things. The rest of the world's markets were affected because China is not only one of the world's biggest economies but also because it has been the driver of economic growth in Asia and Asia has been the driver of growth in the world for the past several years. After very rapid growth in the stock markets in China, the downward correction in China appears to have been caused mainly by a trading view of profit taking or protecting capital gains in anticipation of changing regulations and not due to any adverse change in the fundamental strength of the Chinese economy. The other stock markets in the world were also similarly affected by this trading view and not due to adverse changes in their macro-economies.

Second, through advances in global investing technology including the pooling of investible funds through fund managers and information technology, the availability of information and trading decisions on massive amounts of investments around the world can be made almost instantaneously. The impacts of these trading decisions are amplified by the so called computer trades. …

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