# Why does the US economy affect Australia?



## bonkerrs (14 May 2009)

Once again I have a real novice question. 

"The whole market is generally down, and its concern over the US economy at the heart of the problem," Mr Buckley told AAP.

I saw the above in the 'Fairfax Trading Room' news not long ago. Why is this, why is the covern over US the heart of *our* problerm? So if one was to keep up with the general US economy it Aus will more then likely follow the same up or down direction?


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## MR. (14 May 2009)

*Re: US economy*



bonkerrs said:


> Once again I have a real novice question.
> 
> "The whole market is generally down, and its concern over the US economy at the heart of the problem," Mr Buckley told AAP.
> 
> I saw the above in the 'Fairfax Trading Room' news not long ago. Why is this, why is the covern over US the heart of *our* problerm? So if one was to keep up with the general US economy it Aus will more then likely follow the same up or down direction?




Grab some charts out,  year after year,  Australian along with just about all other countries follow the US.  Why?  Good question,  it’s just so I suspect. 

The US is the world’s biggest market and near last to close.  UK would have some influence to the US while trading at similar times but I have noticed the UK quickly pulls into line once the US market opens. One day this will change.  When it does, no doubt trading in Australia will be better as it trades at the same time as Asia. 

If something else shocks the US or if Europeans have a banking shock overnight, the US can, but we can’t adjust our holdings while it’s happening and you can guess what will happen on open in our market.  Although the market had a good yearly lead up to the crash on the 19/10/87, a 20% US market drop over night dropped our market by some 25% that following day.  You can imagine the open here.  Stops would have been completely jumped at open.  If you were a buyer at open how would you calculate the price?  Not saying such a fall is going to happen again soon, but it does have some merit with regards to trading here.


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## Mr J (14 May 2009)

bonkerrs said:


> Once again I have a real novice question.
> 
> "The whole market is generally down, and its concern over the US economy at the heart of the problem," Mr Buckley told AAP.
> 
> I saw the above in the 'Fairfax Trading Room' news not long ago. Why is this, why is the covern over US the heart of *our* problerm? So if one was to keep up with the general US economy it Aus will more then likely follow the same up or down direction?




Markets heavily influence each other because economies heavily influence each other. Our top trading partners are China, Japan and the US. What affects them affects us. Think of it as a ripple in a pond.


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## Temjin (14 May 2009)

Why?

Globalisation (World Trades)
Global Banking System (international banks borrowing from each other)
US Economy is one of the largest on this planet
70& of US GDP is consumption
A lot of those consumptions are made in China
And China needs alot of resources from Australia to sell them to the US
US Dollar is the official world reserve currency
More and more and more

Like MR. said, go and grab a few charts of the individual country stock exchange markets in the last few years.

You will be surprised at the correlation between those countries. So much for diversification in "international equities".


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## beamstas (14 May 2009)




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## skc (14 May 2009)

Good answer, post #4.

Good answer all other post. But to the wrong question! The question is about the economy, not about the markets. 

Ultimately, every industry anywhere in the world relates to the consumer. It relates to how people live their daily lives. US has the largest consumption in the world, it is the end of the chain, so to speak. When the end of the chain reduces demand, everything upstream takes a hit.

Less new car purchases, less steel required, less steel mills in China, less iron ore in WA, lower income for miners, less spending at smoko, smoko lady income reduces, her kid gets less toys, Matel sells less toys, less plastic is used...


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## doctorj (14 May 2009)

skc said:


> Good answer, post #4.
> 
> Good answer all other post. But to the wrong question! The question is about the economy, not about the markets.



This is true, but I guess the markets and the real economy should be roughly correlated in the long term (on the basis that a material divergence is not sustainable over higher time frames).

I think the points made by others (posts 2 -6) are all reasonable.  One I would like to add is that the US historically (and still today) provides a large proportion of global risk capital.  When things are bad in the US, US investors tend to sell down their foreign assets first to maintain capital ratios and meet margin calls. This does not only affect the markets, but growth in non-US economies (less capital, means less local innovation, risk taking and flexibility in businesses).


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## bonkerrs (14 May 2009)

Thanks for the replies to sort me out... but, this may be beyond a forum thread - too long a subject to cover here.

Need to understand it from basics.
1. How does it that affect the share prices on the overall Aus sectors/industries? Example: if the US banks have issues and it hurts their economy, why then does Australia, the next day, suffer in its (all) share prices? 

The Australian share market is made up of people from lots of different backgrounds... mums and dads. How does what happens in the US make these people change their minds and sell or buy shares so quickly?

edit:
Thanks mod for making the title more detailed.


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## Gundini (14 May 2009)

Tha basics are this:

US is the worlds biggest consumer.

China is the biggest supplier.

Australia is a raw material supplier.

China needs to buy Aus materials to use in the production of goods, which will be exported to the US.

The US is not buying as many goods.

Therefore, China needs to import less supply of materials to produce these goods, due to lack of demand.

So, Australia exports less materials to China. 

Jobs are lost while the exporter downsizes.

Less money is available to flow back into the economy.

More money is taken from the tax payer to prop up the unemployed.

The Aus economy slows. 

Growth is put on a hold.


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## doctorj (14 May 2009)

bonkerrs said:


> Thanks for the replies to sort me out... but, this may be beyond a forum thread - too long a subject to cover here.
> 
> Need to understand it from basics.
> 1. How does it that affect the share prices on the overall Aus sectors/industries? Example: if the US banks have issues and it hurts their economy, why then does Australia, the next day, suffer in its (all) share prices?
> ...



I really think you're looking in the wrong places.  In the very short term, it's hard to assign 'reasons' for movements.  The media love doing it (eg. One day you'll here something along the lines of "the market fell as investors became fearful of rising oil prices" and the next you'll here "the market went up as rising oil prices returned confidence to the market), but it's largely meaningless.  Overnight movements are probably more due to margin calls, portfolio rebalancing and hedging open positions held in closed markets.  The correlation wouldn't be anything to do with 'mum and dad investors'.


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## jono1887 (15 May 2009)

I think a lot of the movements are purely due to sentiment. Investors in Aust generally trade based on the sentiment of the US market the night before.... although the other reasons mentioned earlier are also correct.


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