Economic Recovery and Financial Market

The Year have started off along with the expectations of financial market recovery. After a huge backlash in the financial market conditions which brought uncertainty, there is a general feeling that situations might be in control here after. Financial markets have seen many ups and downs especially after 2000.

There was a sharp decline at 2007 and then again a great fall in 2008. This severely affected many countries economy.  Unemployment, price rise, share stagnation and many more outcomes of this downfall shocked every nation.

Now, the conditions seem to be favorable for the growth of financial markets. Financial markets conditions are slowly regaining the power. Since the financial markets have a direct impact on the economy, we can say that global economy is also recovering. Increase in borrower’s credit risk, more market participation and increase in the liquidity of financial markets are some of the signs that indicate that financial markets are recovering.

There are two types of interest rate spreads. One is the London Interbank Offered Rate also called as LIBOR or and the other is the one between T-bill rate and the commercial paper rate. LIBOR is used by the banks for borrowing funds in dollar denominations. During 2007, the LIBOR spread was constantly decreasing. But, now this is in an increasing mode which clearly indicates that financial market is in an upfront mode.

There are many factors which suggest that economic recovery and financial market are very much related. Economic shocks can have an impact both on economic environment and the financial market. For example if there is adverse news on productivity of a product, then the productivity of that product will be low for some time, brings uncertainty among investors who have already invested in the firm which manufactures the product, new investments will be blocked as people become more cautious about the firm and the credit risk spreads.

Similarly if there is volatility on the same product, it could also cause adverse effects as the same along with increasing the financial market stress.

Economic recovery and financial markets grow with hand in hand. Both have an impact on each other. If there are shocks which slows down the economic activity, then it would make the borrowers detain their balance sheets. This also increases the financial market stress. But in contrary if there is a shock on financial condition which directly affects the borrowers then financial markets declines along with spreading the credit risk and the financial cost of the shares.

If there is a rise in the financial market then the economy of the country is said to be in developing stage. This is the reason why the currency of United States remain high when compared to other countries. The financial market condition in United States is always better than any other country. Also, many companies in United States have their operational world wide. Because of this, if there is a dip in the economy or financial market in United States, whole world would feel the change.