Friday, 17 July 2015

Modern Global Economy 2015

Globalism is here to stay and in an overtly simplistic view I shall attempt to illustrate how markets today have become so inter-linked.

Firstly, at the heart of the modern global economy are the equities markets. The modern corporation is the engine of all economic activity. it combine resources, employs capital and labor and utilizes entrepreneurship to make markets happen and deliver goods and services to consumers. The Dow Jones Industrial Average is the chief barometer of global corporate activity. People in Tokyo love to eat a Mcdo's or KFC just as much as people in Mumbai wish to pay for goods with their Citibank credit card, or drive their new Ford in London or even buy a nice new G.E refrigerator in Amsterdam. When people in Milano stop ordering their Starbucks and people in Paris stop buying Apple items, then global corporate cash-flows become affected and equities values plunge on drop in earnings. Similarly, companies on the European exchanges best summed up through Euro Stoxx 50 for the top European companies have cash-flows in USA, China and everywhere else which can be jeopardized by consumer sentiment.

Secondly, global interest rates provide credit lines to companies to grow. Key interest rates are the US Dollar rates determined by the Federal Reserve. When Interest rates in the USA go up as they have been preparing for over the last 3 months, then equities investors get nervous because companies will have to face higher borrowing costs. Bond investors also will not be happy to see US interest rates go up because of the inverse relationship between interest rates and prices; when interest rates goes up prices of bonds go down.

Thirdly, the value of the dollar is very important to the global economy because most commodities and raw resources like crude oil are quoted in terms of US Dollars as is gold bullion. when the US Dollar is cheap in value relative to the Aussie Dollar or Swiss Franc or Euro currency, then more of the US Dollar currency unit can be purchased and demand for commodities increases. When the value of the US dollar increases it then becomes more expensive to acquire a barrel of crude oil and an ounce of gold bullion. Also when the US Dollar is expensive it becomes more expensive to purchase US stocks and bonds.

Thus in this simple explique we can truly understand the nature of the global economy where events in one region can affect the other. This is because today large corporations around the world have been driven to internationalize in the search for increased sales and higher market value.