World Stock Market Integration
World financial markets represent an integral structure, the components of which cannot exist without each other. In today's world any global processes do not occur by themselves. Dynamics of changes in stock indices is immediately reflected in the exchange rate. The rise in price of gold and oil shakes the commodity markets.
Experienced traders have learned to notice the effects of exchange rate changes on various segments of the world economy. So, import-oriented sectors show a lower result in the weakening of the dollar, whereas the export enterprise thrives. The reason is quite simple: when the U.S. dollar strengthens, imports become cheaper, which increases the turnover of importers.
The most significant correlations between stock and currency transactions are observed on the “carry trade” and the Dow Jones index. Accordingly, when stock markets start to grow – this reflects the growth and desires of traders to risk. Typically, when the Dow Jones starts to grow, the appetite of investors is increasing both with the "carry trade" transactions on the Forex market. When the main stocks fall; the falling of quotations of the cross-rates with the Japanese yen starts immediately. This suggests that investors are risk averse and starting to look for safe-haven currencies (U.S. dollar, Swiss franc) in order to save money.
World Stock Market Integration: Stock Indices
Today there are many stock indices that show the weighted value of a specific number of shares.
Some companies are combined into one sector, other indices tracks the performance of all companies listed on the stock exchange. Let’s take a look at the most important global indices:
• DJIA (Dow Jones Industrial Average – the Dow) - USA;
• OMX Stockholm 30 – Sweden;
• SBF 120 (Societe des Bourses Francaises 120 Index) - France;
• FTSE-100 (Financial Times Stock Exchange 100 Index) – Great Britain;
• Euro Stoxx 50 - Germany;
• IBEX 35 (Iberia Index) - Spain;
• Nikkei 225 - Japan;
• AEX (Amsterdam Exchange index) – The Netherlands;
• ATI (Austrian Traded Index) – Austria;
• TOPIX (Tokyo Stock Price Index) – Japan.
Changing the value of the index shows the dynamics of the situation on the stock market. If the index rises, it means investors buy stocks, business activity is high, and the economy is actively developing. Same applies to the fall of the index. It is testimony to the stagnation of the state economy.
World Stock Market Integration: Forex Market
Fluctuations of stock indices have a significant impact on the prices of currencies in the international Forex market. To understand the impact of the stock market to the currency quote, you need to analyze the volatility of the respective indices. So, the relationship of GBP/USD currency pair and securities analysis should be based on the change in the Dow Jones Industrial Average and FTSE-100. If the U.S. DJIA index reported a growth, while the FTSE-100 during the trading session is losing ground, it's safe to expect growth of US dollar against the British pound. If two indexes simultaneously rise or fall, one should carefully monitor the dynamics. For sure one of them is losing ground faster. However, in such a situation it is more complicated to track the relationship between stock exchange and Forex market.