June 16th 2014

The Markets

Investors remained complacent even in the face of unexpected events in Europe and the Middle East this past week. Last week, news media reported civil war in Syria has boiled over into Iraq, and ISIS (Islamic State of Iraq and Syria), a Sunni extremist group, has seized control of hundreds of square miles. According to CNN.com, the group’s ambition is to create an Islamic state that encompasses the Sunni regions of both Iraq and Syria. The Economist pointed out the potential for volatility in world energy prices is because significant portions of the world’s energy reserves are controlled by Middle Eastern nations.

In Russia, politicians are encouraging a de-dollarization of their economy, and leaders of several Russian banks have indicated they are bypassing the U.S. dollar in their international transactions. China and Brazil are settling some of their trade with their currencies as well. According to Barron’s, “Major nations don’t want to pay the virtual toll in the cost of acquiring dollars to conduct trade. The maturation of their own financial markets increasingly give them options to attempt working around the dollar-centric financial system.” U.S. stock markets largely finished the week lower; however, the CBOE Volatility Index (VIX) (the so-called fear gauge) remained at levels suggesting investors remain relatively unruffled.

The World Cup & Finance

Paul, the German octopus oracle, did pretty well predicting outcomes of 2010 World Cup matches. Paul’s approach wasn’t too scientific and, now that he is gone, a lot of folks are turning to animal prognosticators. China has a team of baby pandas and Germany has put Nelly the elephant on the task. In case you’re not a soccer aficionado, The World Cup – soccer’s version of the Super Bowl, World Series, Stanley Cup, etc., etc. – began last weekend. SBNation.com’s soccer glossary describes the event like this:

“The World Cup is the most important soccer tournament on the planet. It is contested over 64 games by 32 national teams every four years and tends to be watched by a significant fraction of the global population… Long story short: it’s the most important trophy in the world’s most popular sport.”

The World Cup also provides a lesson on sentiment-driven markets. Market sentiment reflects the optimism or pessimism of investors on the whole – crowd attitude – and it can send markets higher or lower. Stock markets in winning countries tend to outperform by about 3.5 percent for the first month after the win but gains fade by the three-month mark, and markets tend to underperform the following year. When you remove significant outliers, runner-up countries’ markets typically underperform during the three months following the loss. It seems nobody is too pleased about coming in second! While this makes no fundamental sense it does show the power positive thinking and morale on people’s decisions.

Weekly Focus

“Some people think football [soccer] is a matter of life and death. I assure you, it’s much more serious than that.”

–Bill Shankly, Scottish footballer and manager of Liverpool Football Club

Image courtesy of Agencia Brasil as per the Creative Commons 3.0 Brasil License.

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