The Transmission Channels
- Shocks don't stay local — they travel through trade flows, capital flows, and pure contagion
- A China slowdown hits metal traders in 6 continents within hours
- EM currency crashes infect equity futures through carry trade unwinds
- Energy sanctions reprice entire yield curves across asset classes
- One election result can move $3-5 trillion in asset values overnight
The Invisible Wires
Imagine dropping a stone into a still pond. The ripples spread outward, touching every shore. Now imagine that pond is connected to a thousand other ponds by underground tunnels. Drop a stone in one, and waves appear in all of them — sometimes bigger than the original splash.
That's the global financial system.
Every major market is connected to every other market. Not by choice — by necessity. A pension fund in Norway owns Brazilian bonds funded by Japanese yen. A copper miner in Zambia is financed by London banks betting on Chinese construction. An options trader in Chicago is hedging positions against Korean semiconductor demand.
"In the old days, you could have a crisis in one country and the rest of the world wouldn't notice. Now, a sneeze in Shanghai causes an earthquake on Wall Street — and sometimes the earthquake arrives before the sneeze."
— Former IMF Chief Economist, 2024
How a China Slowdown Hits Metal Traders Worldwide
China consumes 50-60% of the world's industrial metals. Copper, iron ore, aluminum, zinc — half of everything pulled from the earth goes to feed the Chinese industrial machine. When that machine slows, the shockwave reaches every continent.
But here's what retail traders don't understand: the shock arrives before the news.
The Transmission Chain:
Stage 1
Chinese developers slow construction
Stage 2
Iron ore orders drop; spot prices crack
Stage 3
Shipping rates (Baltic Dry) collapse
Stage 4
Copper futures break trendline
Stage 5
AUD/USD sells off (Aussie = copper proxy)
Stage 6
Mining stocks globally crash
The smart money sees stages 1-3. Retail traders only notice at stage 6 — when CNBC runs the headline and it's already too late.
Australia
30% of exports go to China. AUD drops 5-15% in slowdowns. Mining sector gets crushed.
Brazil
Iron ore is lifeblood. Vale stock moves 2x China sentiment. Real weakens on outflows.
Chile
Copper is 50% of exports. Peso tracks copper tick-for-tick. Central bank scrambles.
South Africa
Platinum, metals, minerals. Rand collapses. Johannesburg Stock Exchange bleeds.
"I don't trade copper anymore. I trade Chinese credit impulse. Copper is just the scoreboard."
— Commodity Hedge Fund Manager, Singapore
The China Tell: Watch the Early Signals
Chinese property developer bonds, Dalian iron ore futures, and Caterpillar dealer inventories all break BEFORE official China data. By the time the PMI prints, the move is 60% done.
Why EM Currency Crashes Infect Equity Futures
It's 3 AM in New York. You're asleep. In Istanbul, the Turkish lira is collapsing 15% in pre-market. By the time you wake up, the S&P 500 futures are down 2%.
You check the news. Nothing about Turkey. But your portfolio is bleeding.
Welcome to the hidden plumbing of global finance.
The Infection Pathway:
Stage 1: Currency Crack
An EM currency suddenly collapses — political crisis, sanctions, inflation spiral, whatever the trigger.
Stage 2: Carry Unwind
Investors borrowed cheap dollars/yen to buy high-yielding EM bonds. Now they're underwater. FORCED SELLING begins.
Stage 3: Contagion Fear
"If Turkey falls, who's next? Brazil? South Africa? Poland?" Risk models start selling ALL EM exposure.
Stage 4: Liquidity Crunch
Banks that lent to EM need to raise capital. They sell liquid assets — US stocks, investment-grade bonds — to cover losses.
This is why a crisis in a country you've never invested in can destroy your "diversified" portfolio. You're not diversified if everyone is deleveraging at once.
The "Nothing to Do With Us" Crash
In 2018, the Turkish lira crashed 25% in two days. US stocks dropped 3%. No American company had meaningful Turkey exposure. But the banks that had lent to Turkey sold their S&P holdings to cover margin calls.
Historical Infection Events:
Thai Baht → Global
Thailand devalued. Within months: Malaysia, Indonesia, Korea, Russia all fell. LTCM collapsed. US Fed had to intervene.
Yuan Shock
China devalued 2%. S&P dropped 11% over next two weeks. Global contagion fear became self-fulfilling.
Lira Crisis
Turkey collapsed. European banks with lira exposure sold everything. Global EM ETFs saw $50B outflows in weeks.
Yen Carry Stress
Yen weakened to 150/$. Then BOJ hinted at intervention. Carry traders panicked. Global volatility spiked.
"Diversification works until it doesn't. In a crisis, all correlations go to one. Everything falls together."
— Nassim Nicholas Taleb
How Energy Sanctions Reprice Global Curves
February 24, 2022. Russia invades Ukraine. Within 72 hours, every yield curve on the planet has to be redrawn.
This isn't just about oil prices going up. It's about the entire cost structure of civilization being repriced in real-time.
Direct Effect
Oil jumps $40/barrel. Brent goes from $90 to $130. Every transport, manufacturing, and heating cost spikes.
Natural Gas
European gas prices increase 10x. German manufacturers face existential crisis. Fertilizer plants shut globally.
Food Chain
Ukraine exports 30% of world's wheat. Fertilizer costs soar. Global food prices spike 40%.
Inflation Spiral
Central banks forced to hike aggressively. Bond yields explode. Every asset gets repriced.
The Yield Curve Cascade:
When you sanction energy, you're not just sanctioning a country. You're repricing the net present value of every cash flow on Earth.
The Inflation Shock Curve
Energy sanctions cause the short end of the curve to spike (central banks must fight inflation) while the long end follows with a lag (long-term growth expectations decline). The result: curve inversion, credit stress, recession signals.
The Energy Dominoes
Oil → Inflation → Rates → Valuations → Credit → Everything. When you sanction 10% of global energy supply, you're not making a political statement. You're detonating a financial bomb.
When Central Banks Surprise the Derivatives Market
December 20, 2022. 3:00 AM Tokyo time. The Bank of Japan announces it's widening the yield curve control band. They were supposed to keep rates pinned. They didn't.
What happened next was the most violent repricing in Japanese bond market history.
0.25% to 0.50% — a "mere" 25 basis points. But when you have $2.7 quadrillion in interest rate derivatives pricing off those rates, 25 basis points is an extinction event.
The Domino Effect:
"We had traders who had been in the business 30 years saying they'd never seen anything like it. The entire global rates complex repriced in an hour. Every model broke. Every hedge failed."
— Fixed Income Desk Head, Goldman Sachs, December 2022
Why Central Bank Surprises Are Nuclear:
Leverage Stacked High
Interest rate trades are the most leveraged in finance. A 1bp move can mean 10-50% P&L swings.
One-Sided Positioning
Everyone believed BOJ would never move. The entire market was on one side. No liquidity when they scrambled.
Everything Is Connected
Japanese rates → global funding costs → carry trades → EM → equities → everything.
Algorithmic Speed
Repricing happens in milliseconds. Human traders can't react. Stop losses cascade automatically.
Historical Central Bank Bombs:
SNB Franc Floor Removal
Swiss National Bank abandoned the 1.20 EUR/CHF floor with no warning. Franc soared 30% in minutes. Multiple brokerages went bankrupt.
Taper Tantrum
Bernanke mentioned reducing QE. 10Y Treasury yield jumped 100bps in weeks. EM bonds saw biggest outflow in history.
BOE Gilt Crisis
UK pension funds faced margin calls on LDI strategies. Bank of England had to emergency-buy £65B of gilts to prevent systemic collapse.
BOJ Rate Hike
First rate hike in 17 years triggered carry trade unwind. Yen surged 12%. Global equity rout followed.
The Central Bank Rule
When central banks surprise markets, everything that "can't happen" happens. The models are calibrated to expected behavior. Unexpected behavior breaks the models — and then breaks everyone relying on the models.
How One Election Moves Trillions Overnight
November 8, 2016. 10:30 PM Eastern Time. Florida is called for Donald Trump. The "impossible" is becoming real.
S&P futures are limit down — 5%. CNN is calling it "Black Wednesday in the making." Pension fund managers are on emergency calls. This is it. The market is crashing.
Then something strange happens.
By 3:00 AM, futures have completely reversed. By market open, they're green. By close, the Dow is up 250 points. Over the next month, $3 trillion in market cap is created.
Elections don't just move markets — they re-sort the entire probability distribution of the future. Every company, every sector, every country gets repriced based on who holds power.
What Moves On Election Night:
🏥 Healthcare
Drug pricing, insurance policy at stake
🏦 Financials
Regulation, tax policy, rate expectations
⚡ Energy
Drilling policy, climate regulation
🛡️ Defense
Budget priorities, foreign policy
🌐 Tech
Antitrust, immigration (H1B), tariffs
💱 FX
Dollar strength, trade policy
The Global Spillover:
When America elects a president, it's not just an American event. Every country recalculates:
Trade Policy
Will there be tariffs? Sanctions? Trade wars? China, Mexico, Europe all reprice on day one.
Defense Spending
NATO commitments? Asia Pacific policy? Defense contractors and allies respond immediately.
Climate Policy
Paris Agreement in or out? Clean energy stocks swing 20%+ on election outcomes.
Dollar Policy
Strong dollar? Weak dollar? Every EM currency and commodity is at the mercy of this.
"I've traded through 10 presidential elections. The lesson every time is the same: whatever the market does in the first hour, fade it. Whatever it does the next day, respect it."
— 40-Year Trading Floor Veteran
Non-US Elections That Move Global Markets:
Brexit Vote 2016
GBP dropped 10% overnight — biggest one-day currency move in modern history. European banks crashed 20%.
French Election 2017
Macron vs. Le Pen. European stocks rallied 4% when Macron won. If Le Pen had won, expect -15% or worse.
Brazil 2018
Bolsonaro victory triggered 6% stock rally and 5% real appreciation. Market bet on economic reform.
Mexico 2018
AMLO's left-wing victory crashed peso 3% and bank stocks 7%. "NAFTA renegotiation risk" was the narrative.
The Unified Theory of Global Shocks
Every global shock — whether it's China, currencies, energy, central banks, or elections — follows the same transmission mechanism:
Three Channels, One Outcome
Direct: The obvious impact (oil shock → energy stocks).
Funding: How the shock affects borrowing/lending (carry unwind, credit stress).
Sentiment: Fear contagion and risk-off behavior (VIX spike, safe haven flows).
All three converge into the same outcome: everything gets repriced.
The Speed Hierarchy:
Algorithmic Response
Headline-reading algos, HFT, auto-hedging systems. The move starts before humans comprehend.
Institutional Reaction
Trading desks wake up. Risk managers call emergency meetings. Hedges get executed.
Narrative Formation
Media explains what happened. Analysts publish takes. The "story" crystallizes. Second-order effects begin.
Position Rebuilding
Smart money starts buying what panicked sellers dumped. New positions form based on new reality.
The Global Shock Survival Guide
You can't predict global shocks. But you can prepare for them. Here's how the pros do it:
Map Your Exposure
What happens to your portfolio if China slows 3%? If oil doubles? If the yen strengthens 20%? Know the answer BEFORE it happens.
Watch the Canaries
Copper, AUD, high-yield spreads, VIX, TED spread. These signal stress before headlines appear. Set alerts.
Own Tail Hedges
Far OTM puts, volatility calls, gold positions — they cost money every month but save you in catastrophe.
Reduce Leverage Before Events
Elections, central bank meetings, economic releases — cut position size. You can always add back.
Don't Trade The First Move
The first hour of a shock is chaos. Let algos and panicked sellers exhaust themselves. Trade the reversal.
Have Cash Ready
The best opportunities come when everyone else is forced to sell. You need dry powder to capitalize.
"The goal isn't to predict the shock. The goal is to be positioned so that when the shock comes, you're the buyer — not the one being carried out on a stretcher."
— Ray Dalio
The Wires Will Always Be There
Globalization was supposed to spread risk. Instead, it concentrated it. Every market is now connected to every other market by invisible wires — trade flows, capital flows, derivative linkages, algorithmic arbitrage.
When one wire sparks, the electricity arcs everywhere.
This isn't a bug in the system. It's the system.
The next shock is coming. We don't know if it will be a Chinese property collapse, an EM currency crisis, an energy war, a central bank accident, or an electoral earthquake. We only know three things:
The Three Certainties of Global Shocks
1. The shock will surprise almost everyone.
2. The transmission will be faster than expected.
3. The correlation spike will make "diversification" meaningless.
The question isn't whether you'll be affected. You will. The question is whether you'll be the one absorbing the panic — or creating it.
The shockwave travels at the speed of fear.
Make sure you're faster.