Educational Piece: How Global Markets Influence the ASX

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Understanding the dynamics of the global market is crucial for any ASX investor, as foreign economies and stock markets can have a significant impact on Australian stocks. 

Fun fact: Australia’s share market only represents around 2% of the global market. Yep - we’re tiny. 

Many ASX companies are directly linked to the performance of global markets due to their international operations, reliance on commodity prices, and international trade. 

Today’s piece will look at how events in other economies influence the ASX.

The US Market:

Since the US is the world's largest economy and financial market, US developments significantly influence the ASX. 

Notably, the US Federal Reserve's decisions on interest rates can have a major sway on global investment flows. 

For instance, consider the ‘taper tantrum’ of 2013. When then-Fed chief Ben Bernanke announced plans to slow the pace of bond purchases in a May 22nd congress speech (and thus reduce the amount of money feeding into the economy), bond yields spiked. 

This led to an inflow of capital into the US, and an exodus of capital from riskier overseas markets, like Australia, and the ASX 200 plunged almost -10% over the next month.

The ASX 200 chart during the Taper Tantrum.

On a more general note, overnight performance of the Dow Jones Industrial Average and S&P 500 also frequently sets the trading tone on the ASX, given the US market's global benchmark status. If you follow our Morning Wrap, you’ll notice that we often analyse these two indicators to see where the ASX is set to head for the day. 

The Chinese Market:

China's position as Australia's largest trading partner makes it a significant player in ASX dynamics. Its economic health, especially in relation to commodity demand, can directly influence the fortunes of resource-heavy ASX. 

Interrelation of Commodity and Stock Markets:

Global commodity prices and the ASX are intricately linked, given the ASX's resource-heavy composition. 

• Companies in the Basic Materials sector comprise 24% of the ASX’s market weight (the second largest behind Financial Services at 26.2%).   

• By comparison, the Information Technology sector makes up around 28.1% of the S&P 500’s weight. 

Currency Exchange Rates:

Currency exchange rates are critical drivers of global financial health, influencing the ASX as well. 

• For instance, during the mining boom from 2003 to 2011, the Australian dollar appreciated by 81% against the US dollar. 

• This led to increased profitability for ASX-listed exporters, as their revenue in US dollars was now worth more in Australian terms. 

Conversely, a stronger Australian dollar can benefit companies that rely heavily on imported goods by reducing their cost of goods sold.