Thursday, March 01, 2007

Stock Market Domino Effect

'Woebegone Wednesday' would aptly summarize the mood across equity markets around the globe yesterday when a selling spree in the Shanghai Stock market triggered off the worst known global domino effect after the Asian Financial crisis in 1998. Within a single day, the bell weather stock indices of the developed world like S&P, the tech heavy NASDAQ and the Dow Jones Industrial sensex had all taken a hit and fallen to record lows in the last 2-3 years. European and Asian bourses were next as they fell on cue too.

Two key reasons highlighted on how the world has come to be so connected figured in my head as I read 3-4 versions of the story across different dailies.
  1. American equity traders have invested heavily in emerging Asian equity markets like Shanghai, Mumbai, Istanbul, Singapore, etc over the past 5 years.
  2. The yen carry trade is resulting in copious amounts of 'free-yen' flowing out of Japan to be invested in riskier assets and these are getting into the Asian equity markets.

When the world's developed nations have their money standing in the Asian markets, it comes as no wonder then that a jolt or a hiccup here would have its reverberations felt in the mature markets of the developed world. Talk of Globalization and you get an idea of the darker side of it.