Thursday, May 20, 2010

Politics And Markets: Bangkok Burns Edition

How are financial markets and political turmoil correlated?

Not much if you ask me.

This would largely depend on the underlying issues involved. Financial markets appear to be more sensitive to financial issues such as capital controls or debt anxieties than simply compared to domestic political turmoil.

News headlines such as this, "Bangkok Burns Amid Army Crackdown", highlight the unfolding mayhem in Bangkok, Thailand.


Photo from Star-Telegram


The common impression built upon or associated with such chaos would translate to a collapse in the markets, going by media's logic.

But how true is this?

Thailand's SETI is still up year to date as shown in the above chart from stockcharts.com and seems insouciant to the ongoing violence.

And it would seem that Thai markets are even more correlated to the gyrations in the US (as shown by the SPX below). The right vertical line reflects on the latest correlation while the left vertical line marks the start of the year performance.

And it's not just in stocks, but likewise reflected on the Thai Baht (chart from yahoo). True enough there has been a little downswing in the Baht, but this occurred before the violence, and seems likely to reflect more on external factors than the present political predicament.

Nonetheless, the Baht appears to be advancing of late in spite of the Bangkok Burning edition.

Bottom line: Financial markets and political developments don't have strong correlations or the causal link is tenuous. In most cases, they are merely subject to the available bias fallacy by media, which is why the public should learn how to distinguish between real forces and mere rationalization.

The same holds true for the Philippines, which is why the local markets surged in spite of nonsensical chatters of election "failure" risk during the campaign period of the recently completed national elections.

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