Here are some outlines on global factors equity investors need to track closely to get a sense of the possible market direction
In the current environment, the stock markets, across the world, are mainly driven and influenced by factors and developments in the global markets. The world economy has just come out of an economic recession and there has been a good rally across the stock markets globally over the last few quarters. However, the effects of a liberal and soft monetary policy adopted by governments and central banks across the globe have started showing up. Analysts fear the global economy might fall back into a recession again - double-dip recession - if these factors are not addressed carefully.
These are some of the major factors that reflect the progress in the global economy and therefore have an impact on the domestic stock markets as well:
Economic data
There are certain data points that are important when one talks about the world's economic data. For example, consumption/sales and unemployment data. The unemployment rate is quite high in most developed countries and is a major cause of concern. Although the business conditions have started looking up, the rate of new job creation is still subdued and hence this high unemployment rate in developed countries.
The creation of new jobs is very important to sustain consumer and investors confidence. The sales and consumption data is showing positive signs since the last few months but investors should factor in the effects of stimulus spending, and the low base effect of last year on the current numbers. Investors should track global economic data to get a sense on the sustainability of the economic recovery and hence the market direction.
Euro debt crisis
Some countries in Europe are facing a high sovereign debt which has made them vulnerable to credit defaults. The European Union has created a large fund along with the IMF to get these countries back on track. However, analysts believe that this move is not addressing the root cause of the issue. It may just postpone the crisis.
Corporate results
It is close to the end of the second quarter of the current year. Analysts are expecting some unpleasant surprises from some large companies operating in the global markets, especially in the Euro region. An unpleasant surprise from the results front or future outlook would trigger negative sentiments in the markets. Any threat or expectations of a double-dip recession can trigger major corrections in the global markets, including domestic markets.
Although domestic companies are insulated from development in the global markets as they are largely driven by domestic demand rather than exports, negative developments in the global arena indirectly affect the markets here in more ways than one.
These are some of the significant factors that link the domestic markets to global sentiments:
Global investors
Many large investors and global fund houses have increased their investments in domestic businesses and stock markets over the last 10 years. The foreign investors account for a large quantum of investments in the markets here. Negative developments in the global markets impact the sentiments of these global investors and trigger the weaker hands to sell their holding here.
Global businesses
Many domestic companies are involved in direct or indirect business relationships with companies in foreign countries. Negative developments in the global arena expose these companies and businesses to many risks such as business volatility, credit risks and foreign exchange related risks. These companies again trigger negative sentiments in the stock markets.
Global commodity prices
A crisis in the global markets impacts the prices of commodities that are more global in nature such metals, energy etc. The price volatility in these commodities in the global markets gives rise to uncertainty in the domestic businesses related to these commodities.
