As we all know, the Russian-Ukraine tension in Crimea continues to escalate on a daily basis. While this event has been front page news it has not really affected the stock market in the United States. Traders and investors have basically shrugged off all of the geopolitical events; they have simply followed the action in the USD/JPY (U.S. Dollar Index vs Japanese Yen) for market movement. Basically, when the USD/JPY chart moves higher so does the S&P 500 Index, NASDAQ Composite, and the Russell 2000 Index. On the flip side, when the USD/JPY declines so does the major stock indexes. While this lockstep relationship between the stock markets and the USD/JPY will not last forever, it has been firmly intact since late 2012. So it is safe to say that the stock markets really only care about this current trade at this time.
Now we will point out some issues that could affect the USD/JPY chart...
One of the problems brewing around the world at this time is the high Japanese debt levels. Some reports are now saying that Japanese debt is 300 percent higher than its GDP. Any debt level that is this high is extremely alarming. The Bank of Japan is printing more money than the Federal Reserve, and their economy is only one third the size of the United States. How long can this continue? While a weak Japanese Yen helps to lift markets it cannot go on forever; any strength in the yen will disrupt the recent stock rally and an implosion of the Japanese economy could trigger it.
China is also facing a ton of problems. Some of the Chinese problems include shadow banking, high debt levels, and daily liquidity issues. The Shanghai Composite Index is now trading at a five year low and it is not very far from its 2008 lows. The stock chart of the Shanghai Composite is not very healthy looking and signals further weakness ahead for the Chinese economy. China is a major exporter to the United States and has the second largest economy in the world.
Japan and China have also been arguing over a chain of islands in the East China Sea. Any military conflict between China and Japan would affect the United States directly, as the U.S. military is obligated to defend Japan and its territories. This week, military officials will meet in Hawaii to review bilateral defense guidelines for the first time in 17 years. Both China and Japan have had a long history of dislike for each other and are very sensitive to the recent words spoken by the respected leaders of both countries. Any conflict between these two countries could escalate in major global tensions as other countries choose sides.
These are just a few of the problems that are brewing at the start of 2014. Any of these potential catalysts could trigger a decline in the stock markets around the world in the next few months.