More Financial Globalization: Proposed Deutsche Boerse AG-NYSE Euronext Takeover

The trend towards further consolidation of global stock exchanges continues with the proposed takeover Deutsche Boerse AG's of NYSE Euronext.

Integrating national stock markets has been part of the ongoing financial globalization process that will only deepen the correlation of price actions among global bourses. In 2007, I wrote,

With the revolutionary advances in the field of communications and information technology-the advent of on-line electronic trading platforms makes it possible for real-time electronic transactions regardless of the geographical distance.

Grounded on this premise, the major exchanges appears to be in a rush to integrate financial services, to diversify and expand their market coverage, reduce transaction (bookkeeping, clearing and settlement) costs by achieving the economies of scale, to eliminate further inefficiencies by way of human intervention, provide for financial depth by attracting global investors (to augment the demand side), traders and listing companies (to increase supply side), to improve on liquidity by easily matching buyers and sellers, and finally, adapt to the ongoing changes in marketplace by being accessible to the growing significance of institutional investors [pension funds, hedge funds, mutual funds and insurance companies] as compared to retail investors in the past.

And stock markets have been evolving—the introduction of dark pools has also been prodding for such mergers as competition deepens.

Nevertheless with the proposed merger, the Wall Street Journal editorial rues on the apparent the loss of America’s leadership, they write

The merger is nonetheless one more lesson in how easily capital, both financial and human, can relocate. It's no coincidence that the heavily regulated equity business has languished or moved out of the U.S., while lightly regulated derivatives markets have boomed in the United States and elsewhere.

In the early 1990s, American exchanges played host to half of the world's new public companies. Last year, according to Dealogic, U.S. exchanges hosted 171 initial public offerings worth a total of $45 billion. But this U.S. deal-making was dwarfed by the action overseas, where 1,295 companies went public with a total value of $237 billion. The iconic NYSE now lags behind two Asian exchanges in IPO volume. This is partly the result of more rapid growth in developing economies, but it used to be that foreign companies wanted to float their shares in the U.S. Now they're as happy in Hong Kong.

U.S. over-regulation is certainly to blame here, especially the 2002 Sarbanes-Oxley law and its multimillion-dollar compliance burden on public companies. The Securities and Exchange Commission's own exhaustive 2009 survey of U.S. and foreign firms showed that the burden of complying with Sarbox remains a major deterrent to going public in the United States. Yet the agency still hasn't made a serious effort to pare these burdens. (bold emphasis mine)

The lesson is clear: interventionism diminishes competitiveness

Global Equity Markets: Decoupling or Recoupling?

Many have come to believe that the outperformance of ASEAN markets represent signs of decoupling.

BCA Research argues otherwise and observes that the “average correlation between national equity markets has trended higher over the past decade”

They add, (bold emphasis mine)

Equity market correlation reached a peak during the 2008 financial crisis, and what eventually led to the largest global easing episode in history. But correlations still remain high and this suggests that the benefits of diversification are dwindling as investors shift between asset classes rather than between regions in response to market events. It is unlikely that the period of high correlation will end soon. The importance of macro events/drivers (government deficits, financial system health, emphasis on monetary stimulus) over the past decade has been rising and will be an ongoing feature on investors’ radar screens for years to come.

Worth noting:

1. Intensifying globalization has made financial markets more correlated and not less. Hence the above average activities seen in ASEAN or many emerging markets represent outperformance and can hardly be construed as strong indications of decoupling.

And the above dynamic seems also reflected in terms capital flows on direct investments (chart from Google Public Data).

In other words, cross border movements of capital has intensified similar to scale of improvements in world trade. I see this as financial globalization.

And as we have repeatedly been saying, the decoupling is dynamic that has yet to be proven. This will only be evident when global markets and the economies come under duress and not during inflation driven booms.

2. Since the world has been more integrated than in the past, macro dynamics will equally play a bigger role in determining trends in the financial markets or in economic developments. The relevant macro factors will perhaps depend on the proportion or the extent of a country’s exposure to world integration or globalization. And this is where the variability in national performances would emerge.

Global Poverty Rates: Slumdog Declines On Deepening Globalization

The Economist gives us a good news: poverty rates (in %), as signified by slum dwelling, has been declining around the world, since 1990.


According to the Economist,

``THE proportion of the world’s urban population living in slums has fallen from nearly 40% a decade ago to less than a third today. China and India have together lifted 125m people out of slum conditions in recent years. North Africa’s slum population has shrunk by a fifth. But the absolute number of slum dwellers around the world, estimated to be some 830m, is still rising. And in a few countries the share of the urban population in slums has also grown. In Zimbabwe, economic collapse and the forced relocation of urban dwellers have lifted the urban slum population. In Iraq, as a result of conflict, the number of people living in slums tripled in ten years." (emphasis added)

True, the absolute numbers have been rising but the % rates have materially declined.

However, since trade and the GDP has been highly correlated, the principal cause of such decline is most likely due to economic freedom or greater trade (globalization).

According to the WTO, ``Data in real terms show that world gross domestic product (GDP) and world merchandise exports not only move in tandem, but that export growth exceeds GDP growth. Growth of world GDP is associated with an even higher growth in international trade."

Here are some WTO charts...

Merchandise exports and GDP in % annual change (line chart)

Merchandise Exports and GDP (same data but in bar charts)

The distribution or ratio of exports and goods and commercial services to GDP 2007 as seen in via map
Finally, from Heritage Foundation the relationship of economic freedom (freer trade) to GDP.

This is what the protectionists want to reverse, yet sanctimoniously claim the moral high grounds!

Global Central Banks Cut Rates Simultaneously To Cushion Markets!

As we expected, markets under heavy pounding, has prompted SIX central banks to coordinate rate cuts.

chart courtesy of BBC

According to the BBC,

``Six central banks - including the Bank of England - have cut their interest rates by 50 basis points.

``The UK rate move - which had not been expected until Thursday - puts interest rates at 4.5% from 5%.

``The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank trimmed its rate from 4.25% to 3.75%.

``The central banks of Canada, Sweden and Switzerland all took similar action in the co-ordinated move.

``The unprecedented step is aimed at steadying a faltering global economy and slumping stock markets.

``The Fed said that it had acted "in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures".

Separately, China lowered its key rate by .27%. Japan didn't participate but supported the move. (Bloomberg)

Earlier today Hong Kong took the lead when it announced interest rates cuts....

``The base rate for banks will drop to 2.5 percent from 3.5 percent tomorrow, based on the U.S. benchmark target rate plus 50 basis points, down from 150 basis points, Chief Executive Joseph Yam said today. The HKMA tracks the Fed Funds rate, which is now at 2 percent, because Hong Kong's currency is pegged to the dollar.(Bloomberg)

Australia likewise took a surprising 1% cut yesterday.

So central banks are using unparalleled modern ways to deal with the unprecedented scale of deflation by using a combination of various tools, aside from tight collaboration and synchronized efforts among themselves. This seems like their version of "globalization" of central bank policies. Although we really doubt if they can be successful in trying to contain the market process of unwinding the excesses of the past. Maybe they can buy some time.

Nevertheless, since rate cuts are effectively growth stimulus, the impact should be different in national boundaries depending on their capital and production structure.

As an aside, central banks today look increasingly desperate and captive to the political demands of Wall Street.

Financial Globalization: PSE-NYSE Euronext ‘MOU Of Cooperation’ A Step Towards Future Integration?

In our January’s Unifying Global Stock Markets; Asia Looks Next!, we deduced (speculated) that Asia could the be next phase in the ongoing integration and consolidation of global capital markets.

Courtesy of Philippine Stock Exchange

Just recently the PSE and the NYSE Euronext signed a memorandum of understanding (MOU) for cooperation, to quote the PSE-

``To explore new opportunities in trading system architecture and technology, exchange traded products, market participant connectivity and market data management…

In addition, notes the PSE, ``The MOU also includes details on the PSE’s acquisition of a new trading system from NYSE Euronext and its affiliates, which was announced in April 2008. Under the terms of the NYX-PSE MOU signed today, areas of possible cooperation involve the sharing of information and experience on new stock markets products and services. The MOU also embodies the common goal of both companies to provide investors worldwide protection and operating fair, orderly and efficient markets. The MOU was drafted in the spirit that international cooperation between the two exchange companies will facilitate the development and efficient operation of all securities markets operated by the exchange groups.

So at a start what we could expect perhaps to see is the introduction of Exchange Traded Funds and (hopefully) expanded cross listings from listed companies at NYSE Euronext bourses.

Of course, the signing came with a photo-op as Philippine Stock Exchange officials rang the opening bell in one of the recent sessions in Wall Street. You can see the roster of officials at the PSE website.

Bottom line: once the infrastructure have been meshed (trading architecture), what’s to stop NYSE from reinforcing further “cooperation” by acquiring substantial stake at the PSE or a prospective merger and or acquisition.