Macroeconomic Factors That are Related to The Financial Market in US and Chinese Markets
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Macroeconomic Factors that are Related to The Financial Market in US and Chinese Markets
A macroeconomic factor can be defined as the influential natural, geopolitical and fiscal event that has the ability to broadly affect the national or even regional economies. A characteristic of macroeconomic factors is that they instead of affecting a One of the main sectors in the economies that are often affected by these factors is the financial markets. A macroeconomic factor as stated above affects a huge population of people unlike microeconomic factors that affects individual economic decisions and choices. These factors can be said to be anything that influences a particular large-scale market such as the financial markets and other commodity markets. They include and not restricted to fiscal policies and various regulations, unemployment and inflation, diseases and national calamities among others (Benhabib, Liu & Wang, 2015).
The macroeconomic factors can be divided into three sets, those that affect the markets negatively, those that are neutral and those positively affects the markets. The negative factors are those that in most cases jeopardize the national or even international economies. Such factors such as political instabilities brought by a country’s involvement in the civil wars or international wars, mostly heightening economic turbulence because of the reallocation of resources or even damage to properties, assets and livelihoods. Another example can be unexpected catastrophic event such as the 2008 United States economic crises (Dhankar, 2019), the outbreak of a disease such as the Covid-19 which have affected economies all over the world and other global or regional pandemics.
While individual companies perform in the stock marketing differently due to other factors such as earning reports and acquisition announcement, there is outside forces that influences their performance. These factors include the political, macroeconomic, natural disasters as well as manmade disasters as well as market psychology (Dhankar, 2019). This research paper focuses on the macro economic factors that affect the financial markets. The report is narrowed to two major economies the America and Chinese markets.
Factors such as interest rates, unemployment, inflation and economic growth often influences the stock markets. Any stock market is deeply rooted in the economic growth of the place located since the economic growth means more profits for the organization. This translates to the company’s stock value growing. The decline in the interest rates often sets the markets on higher ground since the interest rates are always seems as the forerunners of the economic growth. On the inflation case, a higher inflation brings an opposite effect on the capital markets since it means that the interest rates will raise in the near future. This slows the economic growth ultimately thus inflation brings about negative effect on the stock markets (Benhabib, Liu & Wang, 2015).
The rising of unemployment foreshadows the lower economic growth and the fall in unemployment usually communicates to the investors that the economic growth is fast approaching. these data always communicate to the economic world and investors. Reporting of the data can therefore move the stock markets but if the numbers are more or less the numbers investors expected, the effect is usually minimal and sometimes absent. The numbers however are important to the investors in determining whether the markets as a whole will go up or down (Understanding drivers of interest rates. 2015).
Comparison of China’s and United States Stock Markets
Since assuming power in 2012, president Xi Jinping has focussed on achieving the Chinese dream with the measures aimed at strengthening the china’s equity markets as well as promoting stock markets was the main key players in financing corporate investments. Although being considered as the home for the most developed financial markets in the world, united states only have the blueprints of the dream stock market the Chinese government is considering to come up with (Dhankar, 2019),
Comparing on the age of the markets, the China stock markets with the US markets, china’s financial markets china markets are relatively young. Although shanghai stock exchange was initially started in 1860s, it was closed in 1949 after communists took over power and only reopened in 1990. The Shenzhen Stock Markets also reopened the same year making them only 30 years old. Hong Kong stock exchange was formed in the year 1891 it first began listing largest state-owned Chinese enterprises in the mid 1990’s. this shows that the china stock markets have been fully operational for about 30 years (Johnston, 2020).
The united states stock markets are 228 years old where New York stock exchange (NYSE) originated on 1792 after the buttonwood agreement was signed on the wall street. Since then, a number of stock markets have risen up in the united states. according to the listings of the Securities and Exchange Commission (SEC), there are about 28 national securities exchanges that are registered with NASQAD being the second largest after NYSE. It was established in 1792 (Johnston, 2020).
The main stock exchanges in the united states are the New York Security exchange which have a market capitalization of 29 trillion US dollars with 2300 listed companies. from its electronic order book, the value of share trading in NYSE is 14.4 trillion US dollars. The second is the NASQAD which has the market capitalization of $10 trillion with 3,300 listed companies. in their electronic order book, the value of share trading is $16 trillion (Johnston, 2020).
On the china markets. The main trading markets are the Shanghai Stock Exchange which has a market capitalization of $4.7 trillion with 1561 listed companies. its EOB trading share value is $8 trillion. The second is Shenzhen Stock Exchange with market capitalization of $3.5 trillion with 2,268 listed companies. its EOB value of shares trading is $11.5 trillion. The final main exchange market in china is the Hong Kong Stock Exchange which has a market capitalization of $4.5 trillion with 2477 listed companies. its EOB value of shares trading is $1.9 trillion (Johnston, 2020).
Despite china stocks markets being one of the largest markets in the world, usually haven’t played a prominent role in the Chinese economy since they are very young compared to the economy. as the American exchange markets play in the united states. Another difference is that whereas the united states companies depends heavily on the equity financing, companies in china only a small percentage of the total corporate financing. Which is usually quoted as 5% of the total corporate financing. They rely more on the retained earnings and the bank loans.
Comparing on the investors and wealth, in United States equities are a main part of household wealth where around 525% of the total population own stocks. In china, property ownership, bank deposits and property management products usually make the largest proportions of the investments with the equity markets receiving only 7% of the population (Johnston, 2020). This means that the equity markets play a major role in the United States economy than the Chinese economy both at individual investments and firm investments. This shows that china economy is relatively shielded from disruptive waves in the stock markets but companies remain limited in financing opportunities. This is a factor that can slows or blocks overall economic growth of china, which Xi Jinping is trying to overturn (Johnston, 2020).
Whereas the united states economy plays a major role in financing the corporates through the equity trading, in china stock markets are seen as a casino, which is usually dominated by a few uncomplicated retail investors who instead of looking for a long-term sound investment seems to be gambling their wealth. This difference between the two country can be further elaborated through their proportional equities where in 2019, the U.S equities that was controlled by institutional investors ranged at 62% while at the same year 99.6% of the total Chinese investors on stock markets were retail investors (Johnston, 2020). One of the main reasons for this trend in china is the simplicity nature of the investors. This has led to exchange markets being likened to a casino gambling rather than an essential for economic growth. China government in the recent years have been trying to change this perception so as to bring greater conviction for more professional type of investors (Johnston, 2020).
Macroeconomic Factors That Affect the Two Financial Markets
As discussed earlier the five economic factors mention in the introduction usually affects the performance of individual companies as well as the whole markets. This section the report looks at each individual factor and the effect on the markets. In the financial market, fundamental analysis of individual company gives the insight into the financial health of the company (Benhabib, Liu & Wang, 2015). Technical analysis on the other side gives the insight of the performance and trend of its stock. However as discussed earlier the investors cannot ignore the macro-economic factors within the economic environment of the companies. Now let’s look at the economic factors that usually affects the stock markets as a general
- Economic Growth
The overall health of an economy usually affects the performance of its stock markets. When the economy seems like it is growing, companies have the ability to expand thus increasing the profits. This on the other hand increases the share prices. when the economy is growing, individuals feels more confident abound their financial positions leading to more spending. The opposite happens when the economy is slowing which leads to the companies finding it hard to expand and increase their earnings. The consumers tend to opt on saving rather that spending since they are not that confident with the future. This leads to low circulation of money and the company share drops since they have minimal profits (Benhabib, Liu & Wang, 2015).
The economic growth of both countries is affected by the stock markets. This is the reason in the recent years the Chinese government is pushing on the Chinese perspective on the stock markets. The simplicity of the Chinese people makes it hard for them to use the financial markets to finance the companies and instead run for bank loans and the retained earnings. However, since the assumption of power, Xi Jinping have been putting efforts in promoting the financial markets so as to promote their economy.
In the United States, the stock markets have been in the main stream in the economic growth of the united states. The stock markets are often the sentiment indicators usually impacts on the gross domestic product and the effect can either be negative or positive. In a bull market, stock prices are rising where the consumers and companies gain more wealth and confidence that lead to more spending and higher GDP (Benhabib, Liu & Wang, 2015).
The figure below elaborates the relationship between the economic growth of the united states and the price index of the security exchange using the Dow Jones Model. The diagram elaborates the effect of the 2008 recession period in the united states.
Fig. 1. Dow Jones fell 2008/09 due to a recession. Source: (“Dow Jones industrial average index (DJIA),”
On the graph when investors see the economic outlook looking poor, they rethink on positions they take on the companies as well as think of selling down their equity positions. The strong economy thus gives the investors’ confidence on the equity markets while in the weak economy the investors tries to protect their capital thus moves funds into safer havens such as bond which even though they do not generate revenues as high as stock markets, they do not generate losses as low as the stock markets too (Dhankar, 2019). This means that the investors in the weak I=economies will seem to move to the markets where the risk is lower in regardless of the level of returns.
- Unemployment
One of the biggest indictors of consumer spending are the wages. This means that the consumer gain disposable income which they can spend on consumer goods as well as investments. When the unemployment is high, the consumer spending falls since there is no disposable income which comes as wages. This means that the funds may be limited leading to the consumers spending less in discretion thus only spending on essential item. This means that instead of the consumers spending on investment they tend to save the little they have for they are not sure about tomorrow. This further restricts the earning capacity of the companies thus affecting the stock prices (Benhabib, Liu & Wang, 2015).
The chart below elaborates the inverse relation between unemployment and the stock exchange rates. This is an example of the correlation between the unemployment and attack market behaviour for the last 30-year (priston, 2020)
Fig 2. the 30-year unemployment-stock market correlation (priston, 2020)
- Inflation
Inflation impacts on the level of the consumer spending thus affecting the stock market. During inflation, the cost of goods and services continues to rise, this makes consumer spend more on the essential goods and services reducing their ability and willingness to spend on the non-essential services. The rising costs impacts businesses and their profit since the input’s prices are higher than normal (Benhabib, Liu & Wang, 2015). The company thus remains with two options, passing this high cost to the consumers or if they want to remain competitive, they find a way to absorb these extra costs thus lowering their profit margins. These lower revenues and profit then lead to dropping of the stock prices. The only stocks that sems to gain during inflation are the oil stocks, consumer staples, healthcare and material stocks as well as gold stocks.
The Fed that regulates the interest rates do lowers interest rates so as to stimulate
economic growth. lower financing costs usually encourage borrowing and investing thus increases the prices of the stocks. However, when rates are too low, they can lead to excessive growth bringing about the inflation which in turn reduces the purchasing power of the consumers. This undermines the sustainability of the expansion of the economy. This means the Fed usually use interest rates to regulate inflation. An example is in the moments the federal funds rate reached a high of almost 20% in 1980-1981 so as to counter inflation that resulted from the president Nixon removing the U.S from the global standards.
- Interest Rates
High interest rates have a negative effect on the stock markets. Stocks usually sells off when there is prospect of higher interest rates in the future. What higher interest rate means is reduced borrowing capacity for businesses thus impending the ability for the businesses to grow. The stagnation of business growth affects earning growth thus lowering the stock prices (Dhankar, 2019). On the side of the consumers, higher interest rates also negatively affect the consumers in that they experience a raise in mortgage interest payment thus reducing their ability to spend. This creates less demand on non-essential goods and services affecting the earnings and stock prices of the companies. the high interest rates also discourage investment of the consumers thus reducing the demand of stocks in the market. This pushes the stock prices to fall (Benhabib, Liu & Wang, 2015).
In the United States, investors always compare from the wide variety of invest where they have options of average dividend yield to the blue-chip companies to the interest rates on the certificate of deposit. They also have the option of the performance of the treasury bond and they always go for the option which provide highest rate of return. This means that the interest rate determines when to invest on the stocks and when to invest on treasury bonds and certificate of deposit, which are least affected by the raise of interest rates.
On the Chinese markets, the same effect is experienced as shown that the people’s bank of china had to cut its key lending rates by 0.25% points to 4.6% in effort to calm the stock market turmoil that ran in two days on august 2015. The move boosted global stock price further which the London’s FTSE 100 raising 3% while Germany Dax gaining 5% and Paris Cac raising by 4.1%. (Johnston, 2020).
- Exchange Rates
Weak exchange rates mean cheaper exports internationally. This means companies that export products overseas are at advantage since the demand on their exports is high thus the earnings are higher. On the other hand, a stronger exchange rate is cheaper for imports thus companies involved in importing goods and services are at advantage. However, a stronger exchange rates means some companies will struggle since the prices of goods and services are higher than on other countries thus uncompetitive (Benhabib, Liu & Wang, 2015). This complexity of the exchange rates affects individual companies in the markets and their stock prices affected as well.
More foreign investors view dollar as a save have investment thus buy U.S currency whenever other nations experience difficult financial constraints. On the other hand, investors sell dollars when the united states economy is experiencing downturn. Whenever the dollar drops in value, the prices of good that are demonised in dollars increases. Consequently, energy companies rise as the dollar weakens. Imports become more important but foreign companies gets goods at lower prices (Understanding drivers of interest rates. 2015). On the other hand, the stock prices of the local companies lower but the prices of the international and foreign companies rise.
In china, the similar effect is experienced although since most of the financing of the companies is distributed with stock financing being the least. The effects in the chines markets is lower compared to the united states but on the other hand the same. China’s economy depends significantly on the exports. When its currency is devalued, the Asian giant lowers the prices of its exports gaining a competitive advantage in the international markets. A weaker currency also makes china imports expensive; production of substitutes products gets spurred aiding the domestic industry.
Conclusion
In conclusion, macro-economic factors largely affect the stock markets in any economy, the united states are one of the economic giants in the world the same as the Chinese economy. Although there is difference in the stock markets such as the period of existence as well as the priority of the companies in looking for financing as well as the investors perception on security buying. This however doesn’t mean the two economies get affected by the macro economic factors as well as other external factors
References
Benhabib, J., Liu, X., & Wang, P. (2015). Sentiments, financial markets, and macroeconomic fluctuations. doi:10.3386/w21294
Central Bank interest rate adjustment over the course of market-based interest rate reform. (2018). Market-Based Interest Rate Reform in China, 60-92. doi:10.4324/9780429469183-3
Dhankar, R. S. (2019). Capital markets and investment decision making. Springer.
Dow Jones industrial average index (DJIA). (n.d.). SpringerReference. doi:10.1007/springerreference_1320
Johnston, M. (2020). China’s Stock Markets vs. U.S. Stock Markets. stock markets. Retrieved from https://www.investopedia.com/articles/investing/092415/chinas-stock-markets-vs-us-stock-markets.asp
Preston, C. (2020). The Unemployment-Stock Market Correlation in One Chart. cabot wealth network. Retrieved from https://cabotwealth.com/daily/stock-market/unemployment-stock-market-correlation-one-chart/
Understanding drivers of interest rates. (2015). Interest Rate Markets, 125-172. doi:10.1002/9781119200949.ch6