With the recent volatility in global stock markets, global stock indexes have caught a very volatile atmosphere for short-term investors and long-term investors as of late, with the spotlight on the global trade dispute between the U.S. and China. But, the final blow to global equity had already been inflicted, when the Nikkei in Japan crashed last July. The reasons for the crash were numerous, ranging from global economic factors to the fundamental weakness of the Japanese market and industry overbuilding. Still, the crash was traumatic for the Japanese stock market, as it resulted in the loss of almost one-fifth of its total market value in a matter of just eight months. And, just like the case with any crisis, the Japanese stock market came out of the crash stronger than ever, as a result of the lessons learned.
As the summer of 2021 approached, many investors, including seasoned ones, started shunning their long positions on all but the most bullish global stock indexes. Indeed, a number of technical indicators combined together to determine that there was little or no chance the U.S. would take the lead in the global trade debate, especially given the state of the American economy. This turned out to be true, as American economic strength proved too much for Chinese economic strength to overcome.
As the summer wore on, however, a new global trend emerged, and it was nothing short of historic proportions. Investors started looking at the possible reasons why the U.S. might fall behind China in the manufacturing sector, given that China is the world’s largest manufacturer. The only solution to this problem, and the reason why traders started looking at the possibility of the U.S. becoming economically tied down to China’s economy, was to turn to index trading for answers. And what better way to do that than through Chinese stock indexes? Index trading offers such diversity, as well as extreme liquidity, that it is easy to see how experienced traders quickly jumped onto this new trend.
By early August, the Chinese stock markets had bottomed out. The question became whether the market could rebound. Traders saw signs that the market may have begun to reverse, especially after the third week of August when the Chinese government unexpectedly devalued the renminbi (the currency of China). The move triggered a massive amount of speculative activity worldwide as traders speculated that the Chinese central bank was trying to raise interest rates to boost growth.
In response, global stock markets fell by more than two percent. While this was a significant drop, the pattern did not last long. On the same day that global financial markets showed signs of retraction, news leaked that China would be hosting the G20, an annual economic summit. Speculation increased that the upcoming meeting could lead to a global consensus against China’s slowing growth.
The benchmark of this particular trade was the S&P 500, which is a measure of the largest global companies. On the first day of trading, the Chinese markets were removed from the index. This action caused a quick reversal, and by mid-afternoon the Chinese stock indexes were trading in positive directions. When the markets returned to the index, they continued to surge upwards, pushing prices of individual stocks even higher.
When traders learned that China was being excluded from the benchmark, many turned their attention to other areas where they believed the G20 could cause a significant effect. Global stock indexes are closely correlated with global financial markets, so traders saw a chance to make money by capitalizing on a possible negative reaction to the China situation. This meant that many investors were left holding the bag. It was not until late August that traders learned that China was still included in the stock indexes.
When traders realized how strong the Chinese economy was, it became clear that the G20 was no longer a possible choice for investors seeking out safe haven investments. Instead, long-term professionals started to look towards Chinese markets for new short-term opportunities. Global index trading has become a commonplace activity as more people look to hedge their risk. This has caused many brokers to begin offering expert advice on how to best position themselves for these times when things do not go as expected. For example, there have been instances when indexes have slid in the past, only to be followed by an explosion of activity as financial institutions seek to regain investor confidence.