Trader’s Narrative

With commodities in a bear market, having corrected sharply from just a few months ago, the white hot emerging markets which relied on them for their valuations, have stumbled badly.

Here is the Russian stock market:

Notice that a long term support line going back to 1999 has been decisively broken. The index is now trading at almost half of what it fetched in May 2008. This reminds me of the Chinese stock market - which has only gotten worse since the last time I featured it in gory detail.

Here is the long term chart of the Brasilian stock market, another heavily commodity dependent equity market:

Although BOVESPA has fared slightly better than the Russian stock market, it too has clearly broken its long term support line going back to 2002.

So what does this mean?
First, a snap back bear market rally is on cue and wouldn’t surprise most here. The nature of prices and markets does not allow for a relentless fall, nor a non-stop rise.

Second, this is yet another reminder of the cyclical nature of emerging markets. They are notorious for running from hot to cold and back again. Which can be great if you keep a disciplined approach and respect your stop losses.

Third, the consequences for the more developed markets is muted since they would only gain from an easing in inflation and reduced raw material costs. While the US markets have not been anything to write home about this year, they have held up much better than these markets. And with the cycle turning from real goods to “paper goods”, that outperformance can only continue.