World Problems and U.S. Stocks

Remember when overseas events influenced the U.S. stock market? From 2010 through 2012, the market zigged and zagged in time with the European debt crisis. Now that the Federal Reserve plans to wind down its stimulus program, which has propped up American stocks, get ready for more shocks from aboard.

World events possibly replacing the Fed means potentially greater volatility than we experienced in the easy money era. It doesn’t take much to affect today’s global economy, especially when high-frequency trading has such an amplified impact on the market. 

Consider, for example, the impact of the falling Japanese yen and Australian dollar on the Standard & Poor’s 500.

It all began with rumors of another corporate default in China, which caused copper prices to fall. Shanghai Chaori Solar Energy Science & Technology, which makes solar cells, became the first Chinese company to default on onshore notes when it failed to make a full interest payment on March 7. The default, although not unexpected, created speculation that other companies would not meet their debt obligations.

As copper prices tumbled, the Australian dollar plummeted at the same time on rumors of a levered fund unwinding, with a tie-in to a commodity play involving China.

The result, as this chart from ZeroHedge shows, was that the S&P 500 mirrored the Australian dollar and yen throughout the day, except for a brief time early in the afternoon.

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If that’s not enough correlation for you, consider how the dollar mimicked the yen recently, while gold has been rallying.

If the rumor of a corporate default in China can have such a significant impact on U.S. markets, what will happen if the Chinese economy continues to decline? What impact will other world events have?

China’s exports fell more than 18% in February, creating a trade deficit of $23 billion. Economists had predicted a 7.5% increase in exports and a surplus of $14.5 billion. March figures showed a further drop of 6.6%, versus March 2013, although Beijing officials said there were distortions from the year-ago period and last month’s was really a positive number. China did have a trade surplus last month, but only because imports dipped.

Fear of a Chinese slowdown already has sent raw material prices down sharply this year. Copper, for instance, is down to its lowest point since 2010. Iron ore, aluminum and zinc also are slumping.

Then, of course, there’s Ukraine. The world sat back and watched while Russia annexed Crimea, former a region of Ukraine.

President Barack Obama said the “international community” will stand “firmly behind” the Ukranian government. After all, standing behind is now the official U.S. response to international crises.

There was little response from the “international community” when Russian President Vladimir Putin invaded Georgia in 2008 and there is little response to his heavy-handed treatment of Ukraine, along whose border Putin stationed more than 80,000 soldiers, 270 tanks, 370 artillery systems and 140 combat aircraft.

To date, Western action has been practically nonexistent. No sanctions (beyond pinpricks affecting a handful of Putin cronies), no strategy, no military action and no economic action. But finally, with tension building, NATO announced its own deployment of fighter jets and exercises in countries on Ukraine’s western border.

What will Putin take next? The rest of the Ukraine? Latvia? Poland? If he does, an armed conflict with the West becomes possible, and war is poison to the market.

Might things be different today if Obama, in one of his first foreign policy actions, had not canceled the deployment of missile defense interceptors in Poland and the Czech Republic, which were negotiated by President George Bush over Russian opposition?

Market reaction is unlikely to be as passive as political action has been to date. It’s time to reset the reset.

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Brenda P. Wenning is president of Wenning Investments LLC in Newton, Mass. 

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