International politics and multilateral relations. The influence of politic events on the international stock exchange

Table of contents

Index of figures

List of abbreviations

1 Introduction
1.1 Problem setting
1.2 Objective

2 Conceptual foundation
2.1 International policy
2.2 Stock exchange

3 Trade Policy
3.1 Approach to Hans J. Morgenthau
3.2 Direct influences in the world economy
3.2.1 Sanctions
3.2.2 Subsidies
3.3 Indirect influences on the world economy
3.3.1 Referendums
3.3.2 Wars
3.3.3 Attacks
3.3.4 Force majeure

4 Stock Exchange
4.1 Supply & demand
4.2 Investment products

5 Investor behavior in practice
5.1 Reaction to direct economic influences
5.2 Reaction to indirect economic influences

6 Conclusion

Bibliography

Index of figures

Figure 1: Airbus chart 2003 - 2018

Figure 2: Dow Jones March - June'18

Figure 3: Influences on the DAX and Dow Jones

Figure 4: Comparison DAX and Dow Jones 1989

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

1.1 Problem setting

Only very few people expected in June 2016 that the British decide to leave the EU in the Brexit referendum. Directly afterwards, the stock market reacted very differently worldwide.¹ In November of the same year no one seriously would have expected that Donald Trump is elected to become President of the United States. The US stock market reacts cautiously and shortly afterwards reaches an all-time high. Political events can strongly influence investor behavior and the market.²

But not only events, like elections and referendums have indirect influence on the world wide stock exchange. Even daily news of sudden crises and wars around the world can change the behavior of investors massively.³ On the other side, political decisions, that are announced for a long time, like sanctions, subsidies and punitive tariffs, can lead to unexpected courses on the stock exchange, too.⁴

Investors and traders around the world have to handle these sudden movements carefully to not lose a lot of money, or better, to make profit. But different events have different results. And depending on where the traders are in the market, they behave different.⁵

1.2 Objective

The aim of this term paper is, to find out which influence political events have on the international stock market. To clarify this question, first of all the basic concepts of the stock market and international politics are explained.

Based on these fundamentals, the approach of the realistic theory of Hans J. Morgenthau is considered. In addition, direct and indirect influences of politics are presented and discussed.

The following explains the basic principle of the stock market and various products with their specific characteristics. Subsequently, the effects of direct influences on and the effects of indirect influences on the stock market are examined. Practical examples show what investor behavior can be observed and whether one can recognize recurrent patterns of behavior for particular types of events.

In conclusion, the question is taken up again and finally formulates how the behavior of investors has changed in the last 50 years and thrown an outlook on the future development. In addition, attention is drawn to areas in which further research effort is necessary.

2 Conceptual foundation

2.1 International policy

The international policy has, intentionally or unintentionally, a far-reaching influence on the stock market. Even events that do not affect the market directly can have a strong impact on it.⁶ The goal of international politics, according to the definition of Hans Morgenthau, is to strengthen the expansion of power and the well-being of one's own country against other countries. The quest for more power has always been in human nature.⁷

In order to establish and maintain this well-being, politicians have some instruments that directly influence the economy of their own country and other countries. A politician can achieve this by imposing sanctions on other countries or by subsidizing the economy in the own country.⁸

It is also possible to negotiate trade agreements with friendly countries, which strengthen economic relations and thus weaken other countries. The advantage of this type of event is, that it is usually announced ahead of time, giving investors and experts the ability to prepare for any impact and develop trading strategies for different scenarios.⁹

Indirect influence on the economy, in turn, has events such as elections and referendums. But even completely unforeseen events such as natural disasters, terrorist attacks or technical failures can make investors nervous, which leads to unexpected price fluctuations. The purchase or sale of stocks is therefore always associated with certain economic, but also psychological expectations.¹⁰

2.2 Stock exchange

The traded volume on the stock exchange has a daily value of more than $ 1.8 trillion.¹¹ Pricing on the stock market works on the principle of "supply and demand". This means that a market equilibrium must be established, as more frequently demanded products become more expensive and less demanded products are more favorable. The aim is that there are always the same number of sellers as buyers.¹²

The decision of investors to buy or sell a share, depends not only on the price itself, but also on the external circumstances. The influence of political events and decisions is driving some participants into buying & selling, which can lead to a 'nervous' price action, or even a crash.¹³

3 Trade Policy

3.1 Approach to Hans J. Morgenthau

The American political scientist Hans Joachim Morgenthau is best known for his book 'Politics Among Nations', published in 1973, as the founder of the theory of international politics, better known as the 'realistic theory'. He described the relationships and actions of international politicians, as the pursuit of power and the achievement of benefits for their own country and country alliances. The basis of his work were the definitions of the philosophers Niccolò Machiavelli on power and Thomas Hobbes on the state of nature.¹⁴

The acquisition of power plays the central role in the work of Morgenthau. On the one hand, it is about having power over the citizens in one's own country as well as being able to influence and control the politicians of other countries.¹⁵

A balance of interests is sought only temporarily. The moral aspect plays only a limited role. From the beginning to the mid-twentieth century, every means of expanding power was considered right. But after the Second World War, the world was anxious to find more moral ways of maintaining multilateral relations. Interventions in the global economy were implemented again, which were already used in ancient times: sanctions and subsidies.¹⁶

3.2 Direct influences in the world economy

3.2.1 Sanctions

Economic sanctions are considered to be one of the most influential instruments of policy to influence the behavior of other countries. Sanctions are initially considered a punitive method and have multiple purposes. First, they aim to change the behavior of a state, prevent alternative (military) means of resolving conflicts, and demonstrate inward and outward determination, thus demonstrating compliance with the norm.¹⁷ The sanctioning measures depend heavily on the country of destination and the purpose the other party wishes to achieve. In resource-poor countries, it makes sense to limit the exports of raw materials to this country, to impose high punitive tariffs or even to refrain altogether. They take goods from this country, which they import mainly from abroad, because there are too few resources in their own country or the mining would cost a lot of money.¹⁸

However, for the sanctioning state, this goal cannot be achieved without making a compromise, because penalties always have disadvantages, even for the sanctioning country. If exports from their own country to the target country are throttled, this leads to a deficit, which weaken their own economy, thus significantly reducing the GDP and endanger jobs.

In addition, the civilian population of the target state often suffers most from the sanctions, which can lead to great distress and thus to protests and civil wars. So, even without military pressure, a moral aspect of sanctions remains.¹⁹

3.2.2 Subsidies

In the economic field, subsidies are defined as a public sector grant to support specific sectors and individual companies. The state has various options for subsidizing the economy. In weak economic phases, the state can grant grants to companies from an existing subsidy fund, which, unlike a loan, does not have to be repaid. Therefore, for reasons of cost to the state, a loan is granted more frequently. This loan is independent of banks and often has better terms.²⁰

However, settlement usually takes place via the company's house bank. The better terms may be in the form of a very low interest rate or special repayment features. If business owners find it difficult to provide collateral, government guarantees are often granted. Another way to subsidize companies is to pay for external costs such as training and consulting. These subsidies ultimately have the advantage that the companies of their own country are more competitive on the world market. A state subsidized company is also often more attractive and creates more trust for creditors and potential investors.²¹

3.3 Indirect influences on the world economy

3.3.1 Referendums

In addition to the direct and targeted interventions in the economy, there are various events that can indirectly influence the economy and the stock market. Very large influence of it can have referendums, which are also called elections.²²

Before the election of a new head of state, this advertises with the policy which he seeks in the case of the electoral victory. So, choosing a head of state who previously advocates strengthening the economy may raise the economic performance forecasts of companies, which is one reason many investors invest in equities.²³

Referendums can also be held on the further development direction of a country. This can be the entry and exit of certain country associations or international trade agreements.²⁴

Domestic affairs can also be decided by a referendum. The complete consequences of the result, the inhabitants are rarely aware. This is partly due to the lack of information from citizens but also to the unpredictability of investors' reactions to the stock market. Even the economies of countries that were not involved in the referendum can be heavily influenced by the outcome.²⁵

3.3.2 Wars

Although strictly rejected and sharply condemned by many countries, there are always wars and violent conflict resolutions in the world. Military warfare is the alternative to sanctions. It does not always have an economic background but every war has an impact on the economy.²⁶

The economies of countries in war are suffering from the cost of military expenditures and defenses. In addition, important infrastructure carriers are being destroyed as war aims. International companies with branches in war zones close them or relocate them to other countries, resulting in more unemployment in the war zone and less money in circulation. The people in war zones suffer from increasing poverty. In addition, investors often pull their money out of these companies because they appear too insecure.²⁷

3.3.3 Attacks

Terrorist attacks alarm many people. When terrorist attacks occur in economically important areas, many investors withdraw their money. The background is purely psychological: fear.²⁸

The fear of terrorist attacks also has an influence on the consumption behavior of the citizens. People think twice about going to a big event or going on holiday in a particular region. In particular, the revenue from tourists in holiday regions such as Egypt and Turkey have suffered greatly from the terrorist attacks.²⁹

[...]

¹ See Alegidede, P., Amewu, G., Odei Mensah, J., Brexit reaction, 2016, p. 41.

² See Khan, M., Rehman, S., Saif, N., Stock market reaction, 2013, p. 165–166.

³ See Rauf, A., Individual investor behaviour, 2014, p. 457.

⁴ See Kejriwal, A., Niranjan, I., Patwa, N., Choice of Investment portfolio, 2017, p. 154–155.

⁵ See Mak, M., Ip, W., Investment behaviour, 2017, p. 1–2.

⁶ See Stiglitz, J., Role of the State, 1993, p. 20.

⁷ See Morgenthau, H., Clinton, D., Thompson, K., Politics among nations, 2005, p. 3–4.

⁸ See Drezner, D., Economic coercion, 2003, p. 645.

⁹ See Elliott, K., Hufbauer, G., Schott, J., Economic sanctions reconsidered, 1990, p. 10–11.

¹⁰ See Chen, N., Roll, R., Ross, S., Economic forces, 1986, p. 386–388.

¹¹ See Stobbe, W., Devisenhandel, 2013, p. 14.

¹² See Conway, E., Schlüsselideen Wirtschaftswissenschaft, 2011, p. 11.

¹³ See Chen, N., Roll, R., Ross, S., Economic forces, 1986, p. 391.

¹⁴ See Morgenthau, H., Clinton, D., Thompson, K., Politics among nations, 2005, p. 180.

¹⁵ See Morgenthau, H., Clinton, D., Thompson, K., Politics among nations, 2005, p. 182.

¹⁶ See Morgenthau, H., Clinton, D., Thompson, K., Politics among nations, 2005, p. 188–190.

¹⁷ See Pierce, A., Principles and economic sanctions, 1996, p. 99–102.

¹⁸ See Pierce, A., Principles and economic sanctions, 1996, p. 106–109.

¹⁹ See Pape, R., Economic sanctions, 1997, p. 90.

²⁰ See Clemens, Benedict, Schwartz, Gerd, Government subsidies, 1999, p. 121–122.

²¹ See Clemens, Benedict, Schwartz, Gerd, Government subsidies, 1999, p. 138–141.

²² See Frot, E., Santiso, J., Elections in economies, 2010, p. 3–4.

²³ See Frot, E., Santiso, J., Elections in economies, 2010, p. 14–15.

²⁴ See Mendelsohn, M., Parkin, A., Referendum democracy, 2001, p. 48.

²⁵ See Mendelsohn, M., Parkin, A., Referendum democracy, 2001, p. 150–151.

²⁶ See James, P., Oneal, J., Politics and wars, 1991, p. 312.

²⁷ See Rubin, B., Political economy of war and peace, 2000, p. 1793–1794.

²⁸ See Brounen, D., Derwall, J., Impact of terrorist attacks, 2010, p. 588.

²⁹ See Brounen, D., Derwall, J., Impact of terrorist attacks, 2010, p. 590–592.