Investors remain oddly complacent even in
the face of unexpected events that have the potential to disrupt global
markets.
Last week, news media reported civil war
in Syria has boiled over into Iraq, and ISIS (Islamic State of Iraq and Syria),
a Sunni extremist group, has seized control of hundreds of square miles. According
to CNN.com, the group’s ambition is to create an Islamic state that encompasses
the Sunni regions of both Iraq and Syria. [1] The Economist pointed out the potential for volatility in world
energy prices is enormous because significant portions of the world’s energy
reserves are controlled by Middle Eastern nations (factor in Russia and
Venezuela, too). [2]
Governor of the Bank of England, Mark
Carney, let markets know the United Kingdom’s central bank may raise rates
sooner than expected to help turn the country’s recovery into a durable expansion.
[3] His speech sparked speculation about the timing of rate hikes in the United
States. President of the Federal Reserve Bank of St. Louis, James Bullard, told The Wall Street
Journal the Fed is likely to raise rates sooner than expected if the U.S.
economy meets performance expectations during 2014. [4]
Russian
politicians are encouraging a de-dollarization of their economy, and leaders of
several Russian banks have indicated they are bypassing the U.S. dollar in
their international transactions. [5] China and Brazil are settling some of
their trade with their currencies, the renminbi and the real (respectively). According
to Barron’s, “The world is actively
seeking an alternative to the greenback. Major nations don't want to pay the
virtual toll in the cost of acquiring dollars to conduct trade. The maturation
of their own financial markets increasingly allows them to bypass the
dollar-centric financial system.” [6]
U.S. stock
markets largely finished the week lower; however, the CBOE Volatility Index (VIX)
(the so-called fear gauge) remained at levels suggesting investors remain
relatively unruffled. [6]
Paul, the German octopus oracle, did
pretty well predicting outcomes of 2010 World Cup matches. Paul’s approach
wasn’t too scientific and, now that he is gone, a lot of folks are turning to
animal prognosticators. China has a team of baby pandas and Germany has put
Nelly the elephant on the task. [7]
In
case you’re not a soccer aficionado, The World Cup – soccer’s version of the Super
Bowl, World Series, Stanley Cup, etc., etc. – began last weekend. SBNation.com’s soccer glossary
describes the event like this:[8]
“The World Cup is the most important
soccer tournament on the planet. It is contested over 64 games by 32 national
teams every four years and tends to be watched by a significant fraction of the
global population… Long story short: it's the most important trophy in the
world's most popular sport.”
The
World Cup also provides a lesson on sentiment-driven markets. Market sentiment
reflects the optimism or pessimism of investors on the whole – crowd attitude –
and it can send markets higher or lower. It can affect markets even when there’s
no change in underlying fundamentals. [9]
So,
how does it work? Goldman Sachs
publishes a 67-page report, complete with a dream team line-up and interviews,
titled The World Cup and Economics.
It could be a program brochure for the event. Regardless, the report includes
data about the performance of countries’ stock markets following a victory or
defeat in the finals. [10]
Stock
markets in winning countries tend to outperform by about 3.5 percent for the
first month after the win but gains fade by the three-month mark, and markets tend
to underperform the following year. When you remove significant outliers,
runner-up countries’ markets typically underperform during the three months
following the loss. It seems nobody is too pleased about coming in second. [10]
Weekly Focus – Think About It
“Some people think
football [soccer] is a matter of life and death. I assure you, it's much more
serious than that.”
--Bill Shankly, Scottish
footballer and manager of Liverpool Football Club [11]
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