Global Markets in a Fractured World

In search of the right chemistry

The annual meeting of the World Economic Forum at Davos in Switzerland never fails to attract the financial world’s leading thinkers, and January 2018’s gathering was no different. We’ve recently been writing about the manner in which global markets make global rules, so one discussion that was of particular interest to us was a talk on “Global Markets in a Fractured World”. The panel was moderated by Maria Bartiromo and featured Adena Friedman of NASDAQ, Stephen A. Schwarzman of Blackstone, Frank Appel of Deutsche Post, Tidjane Thiam of Credit Suisse, and Brian T. Moynihan of Bank of America.

Politics is not a sphere with which traders very often tend to engage, however it is in a sense impossible to be apolitical. National and international decisions are taken every day that have a direct impact on the global economy, so it’s never an inopportune time to ask what factors are most affecting the global market – and to reflect on how this might impact our specialty in the world of intraday market making.

As the topic of the panel rightly suggests, politics on the ground is presently very fractured. How can we expect this to play out in the markets in the year ahead? Areas of curiosity are of course the American economy and European trade policy. In America there had been speculation that the administration’s recent tax breaks might continue to spur what was undoubtedly a bullish stock market until drastically falling earlier this week. Remarkably, the market began to rise again very shortly after, in what the Financial Times described as ‘wild swings…that have marked a return of volatility to equity trading after years of unusual calm.’

It is too soon to tell what will happen next, and the attainment of stable growth is certainly not a science. Regardless of one’s political persuasion however, it is a truth that the financial industry is principally animated by financial incentives. So it was especially notable that the panel seemed to agree that this year will be most interesting for observing how well the financial world can be driven by financial cooperation – the need for which is well illustrated by our current conditions of turbulence.

Here there are of course more questions than answers. Will the TPP beat RCEP to the post? Will MiFID II mature into the catalyst of accountability and transparency it was intended to? It might be suggested that some of the most difficult questions often have simple solutions. In this respect, Frank Appel, the CEO of Deutsche Post, made an interesting observation. As a chemist by educational background, Appel said that he’s instinctively inclined to focus on the fundamentals of complex questions: those elements without which the others won’t fall into place, or will fail to gel. In this regard, economies have to focus on their fundamental strengths. For Europe, he identified higher education levels than the rest of the world. In this domain Europe has a competitive advantage, and he made the crucial point that because of this the continent should seek to open itself to international competition rather than succumb to its protectionist instincts. For him, the rest will fall into place after this.

This made us think about the fundamental strengths of our own sector. As a firm focused on human insight (combined with technology), it’s our view that only by polling the collective intelligence of a variety of individuals can we effectively engage with complex markets. Markets are such complex compounds however that no level of experience can fully prepare any firm for unexpected or unprecedented shifts. This is why we’ve previously emphasised the importance of trial and error, both in developing strategies to trade in the market and in its regulation. Our international structures are presently under more pressure than ever while simultaneously undertaking the most intricate reforms and collaborations in history. In a time of great policy trials, this will be a year that human experience is put to the test.

On an optimistic note, Appel also made the point that his company employs people across different countries that are actually in conflict with one another at a political level. As members of the same firm however they all felt a part of the same project – so perhaps this is the function of business. Few could fail to get on board with such a message, and the broader picture it paints of every corporate’s responsibility when operating across global markets in a fractured world. Whether market participants, clients, regulators or customers, a priority of the financial industry is to communicate in the interests of establishing a chemistry suitable to the whole ecosystem – the alternative is spontaneous combustion.

Daniel Schlaepfer, Hugo Kruyne, February, 2018.