Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_4

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Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_4 GLOBAL BONDS AND GLOBAL INFLATION 143142 INTERNATIONAL MARKETS FIGURE 8.21FIGURE 8.20 A COMPARISON OF GLOBAL INFLATION RATES FROM 1977 THROUGH 1989. (CHART COUR-AMERICAN STOCKS (LOWER RIGHT) ARE BEING PULLED DOWNWARD BY JAPANESE STOCKS(UPPER RIGHT) AND A WEAKER U.S. BOND MARKET (LOWER LEFT) BOTH OF WHICH ARE TESY OF BUSINESS CONDITIONS DIGEST, U.S. DEPARTMENT OF COMMERCE, BUREAU OFBEING PULLED LOWER BY JAPANESE BONDS (UPPER LEFT) AT THE START OF 1990. ECONOMIC ANALYSIS, DECEMBER 1989.) Japanese Bonds Nikkei 225 Dow Industrials U.S. Treasury Bonds U.S. stock prices are influenced in two ways by global markets. First, by a directcomparison with overseas stock markets, such as Britain and Japan (which are influ-enced by their own domestic bond markets). And second, by U.S. bond prices whichare themselves influenced by global bond markets. Discussion of the bond marketand global interest rates naturally leads to the question of global inflation. Its important to keep an eye on world inflation trends. This is true for two rea-sons. Inflation rates in the major industrialized countries usually trend in the samedirection. Some turn a little ahead of others, and some are laggards. Some rise orfall faster than others. But, sooner or later, each country falls into line and joins theglobal trend. Global inflation peaked as the 1980s began. Japan, the United States, in each individual country. If one country gets out of line with the others, its onlyand Italy peaked in early 1980. Britains inflation rate peaked a few months earlier, in a matter of time before it gets back into line. The second reason its so important tolate 1979. Canada, France, and West Germany turned down in 1981. Six years later, monitor inflation around the world is because the direction of inflation ultimatelyin 1986, global inflation began to creep higher again. Inflation bottomed during that determines the direction of interest rates, which is critical to bond and stock marketyear in the U.S., Japan, West Germany, France, Britain, and Italy (see Figure 8.21). forecasting and trading. As you might suspect, in order to anticipate global inflation Since all countries are influenced by global inflation trends, its important to trends, its important to study movements in world commodity markets.monitor whats happening around the globe to get a better fix on the inflation trend144 INTERNATIONAL MARKETS THE ECONOMIST COMMODITY PRICE INDEX 145GLOBAL INTERMARKET INDEXES market prices have been dropping. This divergence, if it continues, holds bearish implications for global stock prices.Figure 8.22 (courtesy of the Pring Market Review, P.O. Box 329, Washington, CT The lines in Figure 8.22 that accompany each index are 14-month exponential06794) compares three global measures—World Short Rates (plotted inversely), the moving averages. Major turning points are signalled when an index crosses above orWorld Stock Index (calculated by Morgan Stanley Capital International, Geneva) and below its moving average line or when the moving average line itself changes direc-the Economist Commodity Index. This type of chart allows for intermarket compar- ...