The U.S. share market has a significant influence on the Australian share market for several reasons:

1.Global Economic Integration

The U.S. is the world’s largest economy, and its financial markets are deeply integrated with the global economy. Since Australia is a small, open economy, its financial markets are highly sensitive to movements in major global indices, especially the U.S. stock market. When the U.S. market moves, it often signals broader trends in global economic conditions, which can affect Australian companies and investor sentiment.

2.Investor Behaviour

Many global investors, including those in Australia, often invest in U.S. markets because of the size and liquidity of U.S. exchanges like the NYSE and NASDAQ. If there’s a major shift in the U.S. market, it can trigger a ripple effect across global portfolios. Australian investors are not immune to this, especially institutional investors who might adjust their global holdings based on U.S. market trends.

3.Currency Movements

The U.S. dollar is a dominant global currency. When the U.S. stock market moves, it can affect the value of the U.S. dollar, which in turn impacts the Australian dollar. A stronger or weaker U.S. dollar can affect Australian exports, commodities, and international business dealings, leading to fluctuations in the Australian market.

4.Commodities and Resources

The U.S. is a key player in global demand for commodities, many of which Australia produces (e.g., iron ore, coal, and natural gas). Movements in the U.S. economy (and its stock market) can directly influence global demand for these resources, which in turn impacts the Australian stock market, especially companies in the resources sector.

5.Sentiment and Risk Appetite

Markets around the world tend to move in similar directions due to investor psychology and global risk sentiment. If the U.S. market experiences significant volatility or a major downturn, it can lead to a loss of investor confidence worldwide, including in Australia. Conversely, a strong performance in the U.S. market can boost global risk appetite, leading to higher market returns elsewhere, including Australia.

6.Global Market Hours and Timing

The U.S. market has a large influence because of its trading hours, which often precede those of the Australian market. News or major events that occur during U.S. trading hours (overnight for Australia) can directly impact Australian markets when they open. Traders and investors are often reacting to the latest developments in the U.S. stock market when making decisions in Australia.

In essence, the strong connections between the U.S. market and the Australian market arise from global trade, investor behaviour, currency movements, and shared market sentiment, all of which create a high level of interdependence.

Lauren Hua is a private client adviser at Fairmont Equities.

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