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It’s a Small, Small World

By:

President Y H & C and a Portfolio Manager for Interactive Advisors

“The world is getting more connected through technology and travel. Cuisines are evolving. Some people are scared of globalization, but I think people will always take pride in cultural heritage.” —  John Mackey

A few years ago, there was a movie called The Curious Case of Benjamin Button, starring Brad Pitt, about a person living backwards from death to birth.  

In the story, there is a scene where the main character suffers an unfortunate accident. The story goes on to account for every single action the character made that affected his timeline and destiny.

I bring this up because in many situations, including the financial markets, a lot of independent events combine to produce an outcome.  In my view, to see the world is to understand how small events in one part of the world can affect markets elsewhere.

Market Volatility

Global equity markets have been experiencing heightened volatility over the last few weeks.  In my opinion, there are quite a few intertwined issues at work here. 

First, China’s economy has a large export component, accounting for nearly 50% of all GDP.  China has made the domestic economy a focus, to reduce its dependence on exports over the last decade.  

Second, there’s President Trump’s decision to slap more tariffs on all Chinese exported goods to the United States. 

Currency Markets

In response, China’s central bank altered its yuan currency band that is effectively pegged to the dollar.  The move pushed the value of the yuan lower against the dollar, perhaps to offset the US tariffs. 

Global currency markets also reacted to decisions by several central banks, including in India, to lower interest rates. Lower rates in turn have an impact on currency and bond markets. 

In Japan, a creditor nation where the yen is considered a safe haven currency in times of volatility, its currency strengthened

Japanese Rates

Japan is also an important country when you consider the effect of weak monetary policy.  For more than three decades, the Japanese government has tried to help its domestic economy by keeping interest rates quite low.

As a result, the country’s banking sector is under pressure as many smaller lenders cannot make enough interest income from loans to be profitable.

The larger Japanese banks have turned to global markets to find areas to make more interest income, especially in the United States. 

Bond Markets

With the heightened volatility in the currency markets, investors are rushing into the bond market to buy Treasuries and other government bonds.  

US bond yields fell, so much so that they broke the 1.7% level this week before recently rebounding.  

Relatedly, US stock markets have been pummeled in recent trading sessions as a result all of these moves, with the Dow Jones Industrial Average falling 760 points in one day.  

Brexit Drama

In the UK, new Prime Minister Boris Johnson is aiming to pull his country out of the European Union by an October 31 deadline, a fact that has put pressure on the pound

So, in my opinion, we have a Benjamin Button situation, in which global market events are very much related. 

In my view, it’s important to keep that in mind, especially when looking for investment opportunities.

Originally Posted on August 12, 2019 – It’s a Small, Small World

Disclosure: Interactive Advisors

This material is not intended as investment advice. Interactive Advisors or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.

Pursuant to the Investment Management Agreement between Interactive Advisors and its clients, all brokerage transactions occur through Interactive Brokers LLC, an affiliate of Interactive Advisors. Interactive Advisors does not offer services through any other broker-dealer. The use of an affiliate for brokerage services represents a conflict of interest. Interactive Advisors clients acknowledge this conflict of interest and authorize Interactive Advisors to execute transactions through Interactive Brokers LLC when they open an Interactive Advisors account. Clients should consider the commissions and other expenses, execution, clearance, and settlement capabilities of Interactive Brokers LLC as a factor in their decision to invest in an Interactive Advisors Portfolio. Interactive Advisors believes it can meet its best execution obligation by trading its clients’ trades through Interactive Brokers LLC. While there can be no assurance that it will in fact achieve best execution, Interactive Advisors does periodically monitor the execution quality of transactions to ensure that clients receive the best overall trade execution pursuant to regulatory requirements.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Interactive Advisors, an affiliate of Interactive Brokers LLC, and is being posted with permission from Interactive Advisors. The views expressed in this material are solely those of the author and/or Interactive Advisors and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

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