Monday, May 22, 2006


Rate Fears Shock Emerging Markets

The international markets were rattled today. "Major Latin American stock, bond and currencies plummeted on Monday, and stocks were on their way to post their biggest one-day drops in two years, as investors stampeded out of emerging markets worldwide fearing higher interest rates and slumping commodity prices."

"The decline followed earlier slumps in Europe and Asia. Turkey's stock market fell 7 percent, and the Indian bourse fell 10 percent. The Indian bourse closed nearly 4 percent down, at a 10-week low. Hong Kong stocks closed off about 3 percent showing their biggest fall in two years."

"In Moscow, Russian shares crashed Monday in their biggest one-day percentage slide since 2003, forcing the MICEX exchange to suspend trading after its main index fell by 11 percent. That accelerated a nine-day selloff which has sliced over a quarter off the value of Russian stocks."

"South Africa, a gold exporter, saw its currency, the rand fall 1.7 percent, after hitting a 6-month low against the dollar, knocked by a sharp fall in commodity prices. The Turkish lira fell 1.7 percent."

"In Latin America, the stock markets in Brazil, Argentina, Mexico and Colombia fell over 4 percent, and Brazil's real currency, which bears on other currencies in the region, plunged 4.4 percent. The Brazilian and Mexican stock markets had hit record highs in early May and Argentina's bourse hit a record higher in April."

"Monday's slump in emerging market stock markets and currencies coincided with a jump in a key gauge of risk perception in emerging markets, the benchmark JP Morgan's EMBI+ index, which measures yield spreads between emerging market external government bonds and comparable U.S. Treasuries. The gauge widened 15 points to to 223 points while spreads on Brazil's debt, the biggest component and a spread closely watched by Brazilian domestic markets, widened 21 basis points to 286 points on Monday."

"Emerging market debt spreads are now at their widest levels since the end of January, marking a sharp reversal since May 1, when they were at the narrowest ever at 173 points, with Brazil at 214 points. Brazil's Bovespa index of the Sao Paulo Stock Exchange fell 4.44 percent to 38,0852."

"Mexico's IPC index fell 3.87 percent to 19,401 points. Ifthe index closes near its current level, it will be the largest percentage drop in a session since September 2002. The peso weakened 1 percent to 11.2960 pesos, bringing its loss so far this year to almost 6 percent. Argentina's stocks fell 6.9 percent on Monday, erasing all gains since the start of 2006 amid renewed fears of further U.S. interest rate increases."

"Some analysts said the Brazilian markets fall was fueled by statements in Vienna by the IMF's managing director Rodrigo Rato who said that the Fed may need to continue raising interest rates depending upon how economic conditions evolve in the United States. 'International Monetary Fund chief Rodrigo Rato said on Monday the withdrawal of stimulative monetary conditions globally is a 'healthy movement' especially given that inflationary risks are to the upside. But central banks need to time moves based upon conditions in their own regions.'"

"'I back the idea that the US monetary authorities have done a very important job in getting to a more neutral monetary policy regarding their own economy. Still some measures might be needed in the future.' Rato said."

"The end of monetary stimulation by all three of the world’s major central banks, the Fed, the ECB and the BOJ, and fears that mounting inflationary pressures worldwide may require more aggressive rate tightening has unsettled global financial markets in recent weeks."

"The dollar slipped against most major currencies Monday as the markets look ahead to the release of several U.S. economic reports later this week. The euro bought $1.2870 in afternoon New York trading, up from $1.2772 late Friday in New York. The British pound rose to $1.8872 from $1.8780. The dollar fell against the Japanese currency, dropping to 111.28 yen from 111.66 yen."

"The dollar bought 1.2036 Swiss francs, down from 1.2259 late Friday, and 1.1149 Canadian dollars, down from 1.1197."

"Gold futures climbed Monday, recovering from a three-week low to post their first gain in four sessions. 'Nearly completing a full $100 correction from highs recorded just 10 days ago, gold now appears to be a reasonable-enough buy to more and more investors,' said Jon Nadler, an investment products analyst at bullion dealers"

"No one is 'yet certain that the bout of profit-taking has come to an end, at the very least, increasing numbers of sidelined buyers feel more comfortable with the low $600's as a buying opportunity,' he said."

"Gold for June delivery rose 20 cents to close at $657.70 an ounce on the New York Mercantile Exchange, recovering from a low of $643.50, an intraday level the contract hasn't seen since April 28. July silver closed at $12.43 an ounce, up 7 cents, after a decline to a low of $12.21. July copper slumped 0.75 cent, or 0.2%, to end at $3.4615 a pound."

"July platinum shed $28.80, or 2.2%, to close at $1,284.60 an ounce, and June palladium dropped $10.05, or 2.9%, to finish at $341.75 an ounce."

I didn't post the link to the IMF comments because the link has some MEAN pop-ups. Here it is for you to view.

The big central banks have been clear at the G7 meetings that this was going to occur. And the LatAm credit spread going from the widest to the narrowest in a few weeks shows how quickly things can change. Did it really make sense that Brazil, with a near-marxist leader should have a currency that gained so much versus the US$? Note that the industrial countries saw their currency rise today.
Is this the world wide crash people have thought about? Theoretically, commodities should do well when markets drop. It was eerie to many people to see both go down at once.
I am a deflationist. I think there is a good chance that everything could fall. when that happens, gov'ts will create money and the inflation cycle will get underway(although it's already gotten off to a good start).

in 1932 commodities bottomed and the bull market in them began. stocks didn't really take off until the late 40s. that's right, at the bottom of the great depression, the commodities boom started. probably carried a long by FDR's inflationary programs and then WWII.

think about it, during one of the worst depression commodities bottomed and a bull market began. I guess you don't need stocks but you need to still buy oil and other commodities that you need for daily life.
PMs going up again... looks like support held at $650.

p.s.: John in VA, Pardon the delay... it's just difficult to organize all the information that bears on the subject.
I am not sure how many of you have read this yet,but watched the drop last week ,and sure there was an underlying force at work...Seems there was. Seems to all make sense now..
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