There is a clear directional correlation between the U.S. equity market and the Taiwanese stock market. By utilizing this correlation, there is an opportunity to make short-term trades based on this correlation. Additionally, it’s been confirmed by research in the Review of Integrative Business & Economic Research (Chen & Gankhuyag, 2022), which explains the “spillover effect” from the U.S. to Taiwan. Furthermore, Econometric models like TGARCH and EGARCH prove that the U.S. market volatility can forecast the following day’s trading session in Taiwan, specifically in the technology sector. Taiwan produces over 60% of the world’s semiconductors and more than 90% of the most advanced chips. Therefore, they are deeply tied to the global supply chain, and one of the biggest customers is the U.S. technology companies like NVDA, AMD, and AVGO.
The key here is to observe how the U.S. equity market reacts to macro events and news, specifically, the technology sector. Since the U.S. market will react to major news before the Asia market opens. By utilizing these movements for early signals to anticipate the short-term movements in the Taiwan stock market as it opens after the U.S. market closes.
Many of the global markets like the Tokyo Stock Exchange and European exchanges are influenced by U.S. market trends. However, the correlation is generally lower compared to Taiwan. For example, Japan usually follows the U.S. monetary policy and bond market movements due to being an export country. However, Taiwan has stronger correlation due to the hype in the AI and technology sector which is the main driver of U.S. equity. Furthermore, most of the technology companies are volatile with their earnings to price exceeding the average in the S&P 500. This correlation creates trading opportunities, usually short-term to profit from momentum in the U.S. equity market.
In terms of economy, the U.S. is Taiwan’s largest trading partner and has invested $24.87 billion into the island, while Taiwan has invested $22.15 billion into the U.S. On top of that, Taiwan is the biggest source of technology investment. Therefore, this partnership reflects heavily on U.S. market movements on Taiwan. The time zone provides the biggest edge between these two markets. The U.S. closes before Taiwan opens. Traders can place their trades based on the clear signals from the U.S. trading session. For example, research by Wu et al. (2012) emphasizes that the S&P 500 is the primary benchmark of U.S. investor sentiment and can be used to build Taiwanese portfolios. Additionally, with the close trade relationship and economic ties, it creates a window of opportunity to capitalize on these movements.
If you’re trading Taiwanese equities, especially in the technology sector, the U.S. market should be the main priority to watch and track every night. Track NASDAQ and see how the biggest technology companies like NVDA and AMD move based on key events. Therefore, trading Taiwanese stocks based on the immediate reactions of the U.S. counterparts and exploit the behavioural momentum and market reactions. There is potentially less risk implied than just trading the uncertain reactions in the U.S. equity market. However, during the market downturn in the U.S. equity market, there will be a larger movement in Taiwan.
