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Here's How The Overseas Markets Affect Australian Stocks

Getty/Spencer Platt

Next time you’re in an office lift in Australia, listen to conversations and see if anyone describes what’s taking you up or down as an “elevator”.

It’s an American word but in increasingly common use in Australia.

Chances are that the younger the traveller, the more likely they are to use the American description.

Much of what they read and hear today is written in American English.

There’s been a relentless change in usage of words, accelerated in the last 20 years with the internet, since Hollywood really got going in the 1920s.

Increasingly the English-speaking world is moving toward a common language as the differences in dialects between countries and regions become smaller and smaller.

And so it is in the financial markets. National borders are meaningless in the global flow of company information and economic data.

While Australian equities markets represent a chunk of the Australian economy – Australian companies with Australian business employing Australians – the influence from the rest of the world is huge.

Some refer to Australia being a “cork in the ocean”, in that activity in the global economy, particularly the performance of giants like the US, China, and Japan, can have greater sway over Australia’s share market than Australian companies and economic data.

Yes, the ASX is Australian but it is a market influenced by a global market, by the fears and triumphs of events far, far away.

And because of where we sit in the world, we awake each morning to the news from the rest of the world where their day is just ending.

Good news from the US, the world’s biggest economy, is good news for the markets here. And the reverse is true.

Every day analysts look at a range of events, and data, to try to determine whether there is good news or bad news for markets and economies.

The big one is the Fed, the Federal Reserve, America’s central bank. The actions of this institution are studied in minute detail.

One researcher recently did a study of the minutes of the Fed meetings and determined that each time inflation forecasts were discussed, there was a rise in the duration of nervous laughs.

From this, perhaps, we can determine that the Fed, or at least some of the people on its committee, are worried about inflation. But probably not right at this movement.

The Fed, like Australia’s central bank the Reserve Bank, holds the key to the flow of money and at what price it can be borrowed. At the moment, interest rates are very low.

So when we wake up and hear that the Fed has decided to continue with its bond-buying program, known as “Quantitative Easing” – and therefore keep downward pressure on borrowing costs in the US – the Australian market takes this as a positive.

The progress of China’s economic growth can also have far-reaching impacts in Australia.

Some recent concern that the country’s GDP growth was slowing fed into dips in the share prices of BHP and Rio Tinto, two of Australia’s biggest and most-traded stocks, as the mining giants’ performance is intimately linked to China’s demand for the resources they mine and sell.

News that the big stock indices in New York – the Dow Jones Industrial Average, the S&P 500 or the high-tech Nasdaq Composite, was up almost one per cent overnight is usually welcomed by a rally at the opening bell in Australia.

Certainly, there is local news which moves the markets: fundamental statistics on the economy from the Australian Bureau of Statistics; various measures of business and consumer sentiment; any hint of a change in policy by the Reserve Bank; a trend in recent profits results from ASX-listed companies, or anything else which may change the way people see the market.

Consider this, however: about 40 per cent of Australian share are owned outside Australia.

These people and institutions are influenced just as much by where they’re headquartered, and what they read and hear every day, as by published data and company announcements in Australia.

And what’s happening in the rest of the world is what they’re going to hear.

Grasping it is a key component of understanding the local market’s performance.

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