Understanding Financial Markets: Part 2

Anyoption analyst Brett Chatz takes an interesting look at explaining the inter-connectivity of global financial markets. For more of Brett’s research see the Anyoption blog.


What Happens When Emerging Market Economies Collapse

This is the second post in our Understanding the Financial Markets series – you can read the first post here.

emerging market private capital inflows

The production output of emerging market economies feeds the voracious appetites of developed economies. But when things sour in the global market, EM economies become the victims of collateral damage. This was all too evident in the collapse of emerging market currencies. All the while, the British pound, the euro, the US dollar, the Japanese yen, the Swiss franc and the Canadian dollar remained relatively resilient. So now you can see that there was a growing divide between the performance of emerging market economies and the performance of developed economies. Why is this relevant? Because whenever there is inequality in the financial markets, there is an opportunity to profit from that inequality. Convention says that there is nothing to be gained from bear markets, but conventional thinking should be dismissed because there are ways and means of generating substantial profits even when markets are moving in a bearish direction. We have seen vast numbers of traders generating an untold fortune during the global economic crisis that began in 2008. In fact, an entirely new way of trading the financial markets was popularized, and it was known as binary options trading.

While you reading about experts discussing the details of the impact of the 2008 global financial crisis, you are probably wondering about the recent financial crisis in 2015/16. It is true, China which was once considered to be an economic powerhouse ran out of steam, and its economy contracted sharply. This was unheard of and unexpected. Most every market participant in Asia-Pacific and across the Atlantic never expected it to unfold the way it did. But the Chinese juggernaut was suddenly not growing at a rate of 7% GDP per annum, it had dropped to 6.9% for 2015. While the figure is still impressive, it was evidence that perhaps the wheels were starting to come off the Chinese economy.

China manufacturing PMI



Let’s take a moment to reflect on this. We had the 2008 financial crisis that rocked the world to its very core. We then had 7 years of bull markets on Wall Street, followed by a slowdown in the global economy. This was precipitated by the decline of China, or was it? Most everybody believes that the Chinese economy simply ran out of steam; it was spending and borrowing at an unprecedented rate and not able to consume everything that it had acquired. In other words, the economy eventually could not keep up with its own voracious appetite. However, the truth be told China’s economy actually did a 180° flip from an export-driven economic model to a consumer-centric model which focuses on infrastructure growth and development, the urbanization of millions of people, the construction of cities across China, and the training and development of China’s workforce.

China Data Confirms Global Economic Downturn

All of this has proven true with sharply reduced import and export data provided by the Chinese government. However, as we all know, it’s impossible to maintain the same momentum when you change directions. And this is precisely what is happening with the Chinese economy; it is growing at a decreasing rate as the economy shifts resources from an export-driven model to one that is consumer centric. After the Chinese Lunar New Year in February 2016, we saw a dramatic uptick in the production of steel in China. This immediately resulted in an increase in iron ore prices above $63 per dry tonne. The bullish sentiment was not Pyrrhic in nature, as iron ore prices remained at a high level.

China Iron Ore Imports

The global economy has also been dealing with a dramatic collapse in the price of crude oil. You may recall crude oil trading at well over $100 per barrel in 2015. Well, the rise of the shale oil industry in the US gave OPEC oil producers serious cause for concern. OPEC countries such as Saudi Arabia, Venezuela, Nigeria, Iran, Iraq, Qatar and others were growing increasingly concerned that US production of crude oil – WTI crude oil – was an existential threat to the profitability of OPEC producers. In an attempt to flush out the relatively higher-cost shale oil producers in the US, OPEC began pumping excessive quantities of oil in the global markets. What does this do to the price of crude oil? It sent the oil price reeling because weak demand and oversupply are a terrible combination.

Stay tuned for the next part in unraveling the state of the global economy!

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