I'm kind of curious to learn why US markets are falling due to Greece - Eurozone crisis. US had almost no exposure to Greece bonds and the fear of Grexit and the future of Euro has made the investors to pull out of the European market. But their investments must go somewhere right? Ideally, they could try to invest in US markets, since the macroeconomic indicators of US has been reasonably stable this year. But instead, I see the US markets are also falling? Why is this the case and where is the money pulled out of Eurozone is getting invested?
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asked Jul 7, 2015 at 15:09
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4$\begingroup$ I'm concerned that this is about economics rather than personal finance, though I'm not certain on this point. $\endgroup$– ChrisInEdmontonCommented Jul 7, 2015 at 15:16
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$\begingroup$ Beware that there are stocks, bonds and other kinds of markets here. While cash can be taken out of one place, who says exactly where it has to go? $\endgroup$– JB KingCommented Jul 7, 2015 at 15:23
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1$\begingroup$ The question is motivated from a viewpoint of a personal investor who is interested in increasing his/her returns. $\endgroup$– rambalachandranCommented Jul 7, 2015 at 15:27
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1$\begingroup$ Can you include in your question some evidence that the "US market" is falling? I haven't noticed that. $\endgroup$– dg99Commented Jul 7, 2015 at 16:10
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1$\begingroup$ @WanderingMind "Why" something is happening in global markets is an economic question, regardless of the potential impact on personal finance, just like "Does this medicine cure cancer" could have an impact on investing as well (but would be obviously off topic here). $\endgroup$– JoeCommented Jul 7, 2015 at 16:17
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2 Answers
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As dg99 mentioned the response has actually been relatively muted so far in the American markets (SPX down 3% or so from its peak). Generally, problems in major world equity markets cause cascading problems in their trading partners. In this case there are many American companies that have European stores or otherwise sell into European markets that are affected by the turmoil. There are secondary effects as well as companies that trade with affected companies feel the pain and so on.
As you mention the news out of the US has been fairly positive, but a melt down in the EU would likely overwhelm the tepid growth in the North American region.
The important thing to note here is that the investments do not necessarily need to go somewhere. We can just all agree that the value of European investments is significantly less now because future earnings is likely lower (really for any reason) and the price will change even if no one sells and no money leaves the region. In a very real sense billions of value just no longer exists. However, it is true some people have been selling and investing elsewhere. The main beneficiary is generally safer instruments like bonds which have rallied somewhat.
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$\begingroup$ Thank you for the response. What makes this change interesting and surprising that Greece seems to be influencing the US markets more than the equity rout in China, since China is not just as big a market as Europe, but it will also affect the manufacturing costs of US companies. $\endgroup$ Commented Jul 7, 2015 at 18:40
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$\begingroup$ @WanderingMind China's equity market crash is pretty self contained to china. It is the new speculators that got burned by the government's pump and dump. $\endgroup$– CQMCommented Jul 7, 2015 at 19:27
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$\begingroup$ There's no "crash" in China. It's just a correction after the market doubled in the past year. $\endgroup$– dg99Commented Jul 7, 2015 at 19:42
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2$\begingroup$ China's influence on trade is even larger than Europe's actually especially from the point of view of the US. However, China's stock market is much, much less connected to its economy due to capital controls, government owned companies and lack of stock float. A major China economic slowdown would likely have a large effect on all stock markets, but China's stock market is largely independent of its economy currently. $\endgroup$– rhaskettCommented Jul 7, 2015 at 21:00
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$\begingroup$ Investments do need to go somewhere - the stock price is the value that it was last traded at - if trading stops then the stock price does not change irrespective of the value of the underlying company. In a liquid market (like any stock exchange) this does not happen - trading occurs all the time and the stock price is always a reasonable proxy for the value of the company as perceived by the market. $\endgroup$– Dale MCommented Jul 9, 2015 at 6:36
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Beyond what some of the other answers and comments have mentioned, there are other psychological factors at play:
- Greece leaving the Euro sets a precedent for other countries such as Spain and Portugal who have had austerity measures in place. This could theoretically cascade in to many other countries also leaving the Euro which then adds some major turbulence to global economies.
- More recently, there has also been another mini-correction in the price of oil with Brent falling below $60.
- Heavy turbulence in the Chinese markets must also be considered.
- Markets are trying to predict and factor in upcoming policy decisions by the Fed. Perhaps there is a reduced chance of a U.S. interest rate hike because of poor economic data.
