How the Global Markets Fit Together

What you will learn

• The five main market groups and what is traded in each.
• Why money flows between these markets.
• How a currency move can change your result on a foreign asset.
• Why "macro" means context, not prediction.

Explanation

Macro (short for macroeconomics) is the study of the economy as a whole: growth, inflation, interest rates, employment and money. In this course we use macro to understand why markets move together.

The main market groups are:

• Stocks (shares): part-ownership of a company. Prices depend on expected profits and on how much investors are willing to pay for them.
• Bonds: loans to a government or company. The lender receives interest. Bond prices move when interest rates change.
• Currencies (forex, short for foreign exchange): the price of one money in another, for example euros in US dollars.
• Commodities: raw materials such as oil, gold, copper and wheat. Most are priced in US dollars.
• Crypto-assets: digital tokens such as Bitcoin. They trade around the clock and can be very volatile (prices move strongly).

These markets are linked for three simple reasons:

1. Money must sit somewhere. When investors sell one asset, the cash often moves into another. If bonds pay more interest, some money may leave stocks.
2. Common drivers. Interest rates, inflation and economic growth affect almost every asset at the same time.
3. Prices are quoted in currencies. If you live in Germany and buy a US asset, your result in euros depends on the asset and on the EUR/USD exchange rate.

The links are tendencies, not laws. A relationship that held for years can weaken or reverse. Macro gives you a map of the forces; it does not tell you tomorrow's price.

Worked example

Hypothetical example: an investor in Germany buys US shares worth $1,000. Assumptions: the share price in dollars does not change; only the exchange rate moves. Fees, spreads and taxes are excluded.

1. At purchase, EUR/USD = 1.10 (1 euro buys 1.10 dollars). Cost in euros: $1,000 ÷ 1.10 = €909.09.
2. Some months later, EUR/USD = 1.20 (the euro is stronger, the dollar weaker).
3. Value in euros: $1,000 ÷ 1.20 = €833.33.
4. Change: €833.33 − €909.09 = −€75.76, or about −8.3%.

The shares did not fall at all in dollars, but the investor lost about 8.3% in euros. This is currency risk. It also works the other way: a weaker euro would have added a gain.

Common mistake

Practice activity

On paper, answer: you buy a US exchange-traded fund for $2,000 when EUR/USD = 1.25. Later the fund is still worth $2,000 and EUR/USD = 1.00. What is the value in euros before and after, and what is the percentage change? Ignore fees and taxes.

Key takeaways

• Stocks, bonds, currencies, commodities and crypto share common drivers such as rates, inflation and growth.
• Money moving out of one market often moves into another.
• For a euro-based investor, foreign assets carry currency risk.
• Market links are tendencies that can change; they are not guarantees.

Next step

In the next lesson you will learn how currency pairs are quoted and how to calculate pips and spreads.