World Financial Market Correlations – Forex, Bonds and Stocks
These days, global financial markets are doing substantial trade so that they can establish firm relations with each other. The examples of such countries include Argentina and Brazil. These countries have strengthened their economy via this methodology. On the contrary, the by-product of this trade results in the form of credit demotion. It has significantly hampered the economic growth of countries like Ireland and Greece. However it still remains a fact that for a resilient economic growth, a country should have good ties with inter market.
To know the basics of finance, one should have good understanding of correlation of stocks and currency. Following stuff will really help the readers in this regard.
Stocks and Bonds – As compared to past, now the trend of investment has significantly changed. These days, investors have become extremely careful and calculated. Prior to investment, they do a complete and detailed survey of economic market so that they invest in an appropriate place. This increases the likelihood of getting maximum yield out of their investment. Stocks also increase with the increase in consumer prices as these prices and earnings are dependent on the employment rate. Greater the rate of employment, greater would be worth of stocks and vice versa.
On the other hand, stock prices share a different relation with bonds. In 2008, stock prices decreased sharply as a result of the increase in bond yield. Therefore there has to be sagacious and thoughtful investment of money so that it gives maximum profits to its investor.
Stocks & Dollar - There is no hard and fast relationship between dollar and dow. Sometimes both of these have a direct relationship while at other times they become out of phase. In the recent past, the inverse association between dollar and dow has been observed, owing to the diminished interest rates. With the increase in the dollar price, Fed has caused an increase in the rate of interest. This in turn increases the strength of US dollar. On the other hand, with the decrease in the price of dollar, owing to decreased interest rate, the dollar has become feeble.
Another thing should also be kept in mind that with decreased interest rate (to boost economy), there is no authentic information that fed increases the interest rate. Consequently, it encourages companies to have a loan and invest, on account of squat borrowing costs. This environment encourages clients to comfortably invest in real estate market that boasts economy.
As mentioned above, it is not necessary that the rate of dow decreases with increase in the rate of dollar. At other times, both of these increase simultaneously. The last few years serve as a testimony to this fact.
USD Govt Bond 10: The bond markets enjoy special links with their currencies. Also, these currencies are dependent on the incumbent interest rate. As soon as the economic conditions become viable, an increase in consumer prices grounds a corresponding increase in interest rate.
In the past few years, there has been a sharp decline in the price of dollar that has been a part of a long-term economic trend. This decline is attributed to a lot of factors. These include various macroeconomic factors such as the increased number of dollars printed in USA. Due to this, the worth of US dollar among its competitors has decreases. This consequently increases the commodity prices in USA as more number of dollars is required to buy a unit amount of gold or its equivalent amount of oil. Besides these long term disadvantages, there exist some short term benefits. With the increase in the number of dollars being printed, the commodity prices also increase but the interest rate remains steady. This constant interest rate do offers some enticements to some investors.
10YR, 30 years, divided and bonds:
Bond maturity refers to the particular time on which you will get bond yield. Yield is the cumulative money that is paid back to you when the bond matures. The bond market provides ample information so that you can handle all the issues related with bond maturity. Bond maturity can vary from 30 days to 30 years. A bond with a maturity of 30 years will undoubtedly give a higher bond yield as the sponsor buys the bond for a sufficiently longer period of time. Besides that, bond with high maturity period lend a hand in improving the economic conditions. For instance, USA treasury bonds having a maturity period of 10 years offered a yield of 3.2% while the 30 year bonds tendered a bond yield of 4.2%. This difference between these yields, know as spreads, is really significant from investor’s point of view. This spread encourages the investors to have a go at the bonds of longer maturity period cause a long-term boast to economy.
As mentioned above, it is generally believed that with high maturity bonds have greater yield but this belief is not always true. At times this association gets inverted. An inverted yield occurs when the yield of short term bond gets greater than long term bond which is really considered as a dangerous sign. This is for the reason that inverted yield is considered as the precursor of upcoming economic recession. So it may happen that both types of bonds can give a higher yield. This can be verified by looking the statistics of the bond market of the last quarter of 2007 and 2008 as during these times both of these bonds were offering high bond yield. Consequently, spread also increases proportionally.
Regarding future predictions, it is no very difficult to say something in a crystal clear way. This is for the reason that each investor sees the financial market from a different perspective. On the other hand, it is somewhat possible to predict on the basis of fiscal statistics of the past years. In the end it can be concluded both these lines move closer, regardless of whether Dow decreases or interest rate (10 year bond) increases.
To explain the above mentioned statements, lets we look at an example. Let us suppose we want the stock prices to decrease substantially. This would be possible only when the USD is strong as an increase in the worth of dollar results in the lowering of stock prices. These days the interest rate on USD is very low that encourages the traders to buy USD as compared to other currencies. As soon as dollar gets strength, it will give more yields to its dealers than its counterparts. A good yield really depends upon the amount of risk you are willing to take in your investment as sometime things don’t happen according to the planned thoughts.
For most of the times the financial changeover occurs when these perks are pulling closer but the incumbent scenario will never offer such conditions. As a 30 year bond requires a considerable amount of time to pay back, the expectation of long term success exist to a considerable extent.
If truth is to be told, huge economical changes are very rare. Even if such changes do occur, they mostly affect the long-term dealers. Short-scale traders doesn’t suffer irreparable looses through these changes. The long-term traders can also decrease these effects, if they have good amount of related information. Besides that the detailed analysis of these traders will help us in understanding the decisive factors on which the market depends upon. It will also facilitate in preparing for the future so that least losses are incurred in situations of recessions.
In nutshell, it can be concluded that trends of financial market are somewhat different for different types of traders. In addition, recessions are also rare but whenever they occur they have devastating financial effects. It also needs to be mentioned that sometimes short-term bonds decrease at a faster rate as compared to their counterparts indicating a transient rise in economic condition.