Understand Global Markets Before Investing

Understand Global Markets Before Investing

Understand Global Markets Before Investing

Indian economy is severely exposed to the global market post liberalization. India witnessed a significant growth since last few years, and as a result of large inflows of funds through FII and FDI. This significant investment in the Indian market moves the stock market to new heights and a new position, and vice versa. Most of these foreign funds are large market players, who could move the stock market accordingly, and their activity in the market results in large volatility.

Understanding global market will benefit share trader

India Stock Market is mainly driven by news and events in the global markets. There could be a vast number of reasons affecting the domestic market making it lucrative or a nightmare. For example; speculations over interest rates cut by Fed, rise in commodities prices and fluctuation in global crude oil prices, etc.

Also Read: The IMF’s downward revision to global GDP growth – it’s not all bad news

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Recession in U.S means A ‘Slump’ in India

A recession is a slowdown or a massive contraction in the economic activities. Its’ a period of temporary economic decline during which trade and industrial activity slump; generally identified by a fall in GDP (gross domestic product) in two or more successive quarter.

A global recession contracts industrial output. In the scenario of recession, companies supply and export are hampered the most. The recession in a foreign economy generally creates less demand for goods, which actually lower the sales of exporting nation lowering its performance in the economy eventually leading to lower GDP figures.

financial crises

The above graph compares three indices i.e.  Dow Jones Industrial average, Sensex and Nasdaq 100.  Last 10 years data have been depicted by the graph. We can easily conclude that all the three markets moved in a similar way, with all three down during the 2008 financial crisis. In the mid of year 2009, U.S. economy partially recovered from the recession due to the efforts by the government, and since then all the three indices are continuously rising till date.

Fed changes Indian policies too

U.S. economy is one of the most influential economies in the world. A lot of small and large countries mainly depend on exporting to American markets such as China, India. So we can say that Indian stock market is generally very much influenced by the American market, and negative news in their economy will affect the domestic market severely.

U.S. Federal Policy declaration, which always comes with some financial news, directly or indirectly affects other market.  In 2013, when the U.S. curtailed its $85 billion bond- buying program known as quantitative easing (QE), many markets globally including India witnessed a fall.

Fed tapering has a crucial impact on Indian stock market in many ways like: increase in commodity Prices, increased Inflation, and reduced domestic saving and moderate profit margin.

Commodities too impact the markets

Crude oil and several commodities have a huge impact on the domestic market. We can say that the price of crude had a direct impact on the stock market. An increase or fluctuation in the oil prices and few other commodities directly increase the operational cost, fuel cost, and transportation cost of the companies. Due to the increase in these expenses the profit margin decreases, which eventually forces investors to turn their money from companies dealing in oil or different commodities. This rise and fall is a temporary phase, which causes the stock market to fall and rise respectively.

Also Read: Insights into Commodity Trading 

Crisis in Iraq means crisis in India

Brent crude is one of the most imported commodities, and India is one of the biggest importers of crude oil. The Indian oil basket includes Oman and Dubai sour grade oils and Brent sweet trade in a proportion of 70:30. This crude basket cost around $112 per barrel each to India.

Maximum import of Oil comes from gulf countries like Iraq. Internal crisis in these countries directly affect the global financial market including India. Following are the factor that describes the dependability of the domestic economy on such commodities.

India imports around 80% of its crude oil requirement. This is close to 20 lakh barrels a day. Iraq is one of the largest exporters of crude oil after Saudi Arabia in 2013-14

The value of Indian Rupees is directly related to the current account deficit (CAD). Iraq crisis increase the import price of these commodities, which causes CAD to rise. An. This deficit leads to decrease in the value of the currency, which impacts the market.

Recently, during the internal strife in the North of Iraq, a note from State Bank of India read, “The large Rumaila oil field producing about 15,00,000 barrels per day of oil is also located in the southern region. We thus believe that the fears of a significant impact on India’s current account deficit may be unfounded.” This signifies the importance of such crisis on the Indian stock market.

Also Read: Is the current market rally ignoring earnings trend?

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