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July 15, 2007 / Mridul

Who’s Driving The Stock Markets

Stock markets around the world are making news highs almost everyday. Everything, from Dow Jones to the Nikkei, is up. But this recent upsurge in the world markets has came as surprise for many citing the poor sub prime data from the US. Nonetheless investors, including me, are happy to see their profits swell.

But why are the world markets making new highs. The interest rates haven’t gone down anywhere rather they have moved up; central banks of many countries increased their interest rates many times during the last six to twelve months. Typically this should have crunched the liquidity but as we are seeing that’s clearly not the case.

A source of liquidity is the Japanese yen which the investors can acquire in huge amounts with very little interest rates. The problem will arise if the Japanese central bank decides to increase the interest rates or the Yen appreciates like it did earlier in the year. But the Yen Carry Trade isn’t new & has been going on for years. So what or who are these new sources of liquidity?

There’s a strong possibility that the oil exporters, Russia and China could be the sources of the liquidity. The accumulation of foreign exchange by oil exporters has increased from 3.7% of the global GDP in 1997 to 9.5% last year. The recent surge in the stock markets was also accompanied by oil again moving upwards. The Gulf countries have showed increased interest in investing in new projects & acquiring companies around the world.

The developing countries – Russia, Brazil & India – added $200 billion of reserves in the first six months of this year while China alone added $ 266 billion. China has the largest reserve of forex in the world and has been investing massively in Africa to buy oil fields. Russia has the largest gas reserves in the world and recently was involved in a tussle EU over pricing in which it forced the EU to comply with its demands.

Certainly, if not all, a major portion of the money driving the world markets is coming from nontraditional sources. And some of them aren’t the players investors would like to see pumping money into the stock markets.

Well nobody would like to see large amounts of Arab or Chinese money driving the world markets. Certainly the Americans will have reservations & so will the Europeans in case Russia decides to pump money into European markets & manipulate the geo-political scenario of the region.


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