CURRENT TRENDS and THEMES IN

GLOBAL FINANCIAL MARKETS

Prof. (Dr.) Gourav Vallabh

Professor of Finance
XLRI Jamshedpur
E Mail gourav.vallabh@gmail.com

Please accept my welcome

INTRODUCTION
All markets are interrelated financial and
nonfinancial, domestic and international. No
market trades in a vacuum.
The stock market is heavily influenced by the
bond market. Bond prices are very much
affected by the direction of the commodity
markets, which in turn depend on the trend of
the U.S. dollar.

INTRODUCTION
It is, therefore, no longer possible to study any
financial market in isolation, whether its the U.S.
stock market or gold futures.
Stock traders have to watch the bond market.
Bond traders have to watch the commodity
markets. And everyone has to watch the U.S.
Dollar.

INTER-MARKET THEMES
The key to Intermarket work lies in dividing the financial
markets into four sectors viz. Currencies, Commodities,
Bonds & Stocks.
Key Relationships
The positive relationship between bonds and the stock
market.
The inverse relationship between commodities and
bonds.
The inverse relationship between the U.S. dollar and the
various commodity markets, in particular the gold
market.

Relationship between
Commodities and Bonds
The key relationship that binds all four sectors together
is the link between Bonds & Commodities.
The reason why Commodity prices are so important is
because of their role as a LEADING indicator of
INFLATION.
Commodity Markets trend in the same direction as
Treasury bond Yields & in opposite direction of Bond
Prices.

Relationship between
Commodities and Bonds
Rationale: During the period of Economic Expansion, the
demand for raw materials increase along with the
demand for money to fuel Economic Expansion.
As a result prices of Commodity rise along with the price
of money (i.e.. interest rates). A period of rising
Commodity prices arouses fear of inflation which
prompts monetary authority to raise the interest rates to
combat that inflation.

Relationship between
Commodities and Bonds
Eventually the rise of Interest Rates chokes off the
Economic Expansion, which leads to economic
slowdown and recession.
Now, during recession demand for raw materials &
Money decreases, resulting in lower Commodity-prices &
Interest-Rates.

Relationship between
Stocks and Bonds
Stocks are most influenced by the direction of Inflation &
Interest Rates Rising Interest rates are bearish for
stocks & vice-versa.
Therefore, a rising bond market is generally bullish for
the stock markets.

Relationship between
Commodities and US Dollar
Turns in dollar eventually impact Bonds but only often
long lead times. Thus, impact of Dollar on Bonds &
Stocks must be viewed through commodities.
A falling Dollar is bearish for bonds & stocks because it is
inflationary & it takes time for inflation effects of a falling
dollar to filter through the system.
Thus, inflationary effects of a falling dollar start taking
hold only when the commodity markets start to move
higher.

Relationship between
Commodities and US Dollar
Thus, a falling Dollar becomes bearish for Bonds &
Stocks only when, the commodity prices start rising.
Thus key to inflation is commodity price trends.

Relationship between
Commodities and US Dollar
DOLLAR vs. FOREIGN CURRENCIES vs. GOLD
Gold trends opposite to dollar
Foreign Currencies also Trend opposite to Dollar i.e. as
Dollar rises, foreign Currencies fall & vice versa.
Therefore, Foreign Currencies & Gold mostly trend in the
same direction.

Business Cycles
4-year cycle of business Expansion & Contraction.
The Contraction phase often turns into a Recession,
which is a period of Negative Growth in the Economy.
During Early Stages of a New Expansion (while a
recession or slowdown is still in progress), bonds will
turn up ahead of stocks & commodities.
At the End of an Expansion, commodities are usually the
last to turn down.

Business Cycles
The beginning of an Economic Expansion favors
Financial Assets like Bonds & Stocks, while the latter
past of an Expansion favors commodities or inflation
hedges such as Gold & Oil Stocks.
Periods of Economic Expansion favors stocks while
periods of Economic contraction favors BONDS.

Business Cycles
Recession cycle
As Expansion matures bonds are the first to turn down.
Inflation pressures & resulting upward pressure on
interest rates.
Subsequently, higher interest rates put downward
pressure on STOCKS, which are the SECOND to turn
down.
Commodities are the last to turn down, since inflationary
pressures are the strongest near the END of an
Expansion.

Business Cycles
Recession cycle
At this point of time, the Economy is slowing & in the
verge of slipping into a recession.
A slowdown in Economy reduces demand for
commodities & money. Thus, inflation pressures begin to
Ease & Commodity prices start falling, usually led by
GOLD.
Thus, at this point (at the end of expansion), all THREE
Markets are dropping.

Business Cycles
Expansion cycle
Now, as interest rates begin to Soften, in these early
stages of Recession, BONDS start to rally.
Just within a few months after this, the STOCKS begin to
TURN UP, usually after the MID-Point of a Recession.
Only after the Bonds & Stocks have been rallying for a
while, the Economy starts to Expand, the inflationary
pressures will start building & which will lead to an Up
trend in GOLD & other Commodities.

Business Cycles
Expansion cycle
At this point, all the THREE Markets are rising.
Out of the three markets, BONDS are the FOCAL point
at this juncture. -BONDS have a tendency to peak,
midway through an EXPANSION & BOTTOM about MIDWAY through a CONTRACTION.
Thus, the PEAK, in the BOND Market, during an
Economic Expansion is a signal that a period of Growth
is over & has turned into an unhealthy period of
decelerating Growth.

Business Cycles
Expansion cycle
At this point, Commodity Markets start accelerating on
the Upside & the Bull Market in STOCKS is about to get
OVER.

Current themes
Different markets are currently in different regimes.
Hence, we are in different expansionary regimes across
international markets.
For simplicity, lets consider 2 divisions : developed and
emerging markets.

Current themes
Developed Markets

Initial expansionary phase albeit rocky recovery thus far

Disinflationary period
Bonds have outperformed due to low inflation regimes
Co-ordinated G10 Central Banks infused liquidity in
global markets last year in the form of Quantitative
Easing (QE) to get recovery on board

Current themes
Developed Markets
Stock markets have followed booming bond markets and
are now almost at all time highs
Globally, commodities have not done as well, again
pointing to the fact that the developed markets are sitting
in the middle of expansionary phase and not peaked out
yet in growth

Current themes
Developed Markets Forward Guidance
Going forward, recovery in the US looks on track with
better GDP print and employment data in the last one
year
Federal Open Market Committee (FOMCs) off late have
been more hawkish pointing to an earlier rise in US
interest rates next year

Current themes
Developed Markets Forward Guidance
This augurs well for the US Dollar over the intermediate
term since rising rates mean higher US Dollar
Stronger US Dollar and hence rising US interest rates
would be bearish for bonds and stocks in the
intermediate term
Rising US Dollar would also pressurize commodity
prices that are USD-denominated

Current themes
Emerging Markets
EMs are further on the expansionary curve than the DMs
Faced with duality of higher growth but also higher
inflation
Emerging market Central banks are tussling to keep their
interest rates below the desired levels
Recently, EMs are facing slowing growth coupled with
high inflation

Current themes
Emerging Markets
Lower growth with higher inflation is creating
stagflationary scenarios in some emerging economies
and thats a challenging environment to thrive in
This has caused EM to underperform this year
Also, EM bonds have also underperformed due to
relatively higher inflation
Stocks still near their peaks as we continue to be in an
expansionary cycle

Current themes
India Forward Guidance
India has been facing slowing growth with rising inflation
Bond markets have thus underperformed with the Rupee
being under pressure inspite of higher FII inflows this
year
Stock market near highs mostly on expectations of
structural reforms by the Modi-led Government

Current themes
India Forward Guidance
RBI has been dealing with the high interest rate regime
through consecutive hikes in interest rates (thrg repo and
reverse repo, CRR and SLR hikes)
Last policy has been relatively slightly hawkish,
indicating that the spate of rate hikes could end this year.
Especially with wholesale inflation inching downwards
from double digits to 6-7% levels

Current themes
India Forward Guidance
If inflation stabilizes and keeps at these low levels, RBI
might start cutting rates early next year
Rate cuts would be good for the industry since that
would bring down borrowing costs and spur growth
This would fuel rallies in both bond and stock markets
Rallying bond and stock markets as well as structural
reforms being played out would bring in more capital and
thus fuelling a rally in INR

Question and Answers

Thank you
E Mail
gourav.vallabh@gmail.com