BRICwall Cracking

Our commentary of mid-May 2013, entitled “Falling Like a BRIC,” highlighted the correlation between commodities and the emerging markets asset class, including that of the BRICS. The commentary pointed out that relative to World stocks in general, BRICS had underperformed since way back in 2011, when commodities also peaked.

In September’s, “BRICwall,” update we also commented on the run on emerging market currencies and in particular the three Rs, the real, the rupee and the rand, observing that post May’s Fed announcement on “tapering,” global liquidity had tightened as investors become jittery on bonds of all stripes, hence they had yanked money out of emerging markets and in particular ones with large deficits in their current accounts.

So what’s happened since with the BRICS?

In local currency terms they have performed as follows, two up, two down and one even:-

weekly_blog_140129_01

 

Whilst in $US terms it looks more like this, all down:-

weekly_blog_140129_02

The run on emerging market currencies has continued, hence policy-makers have hiked interest rates in a futile attempt to defend them, slowing the respective economies further.

Perhaps of more importance is the continued correlation between the FTSE BRIC 50 Index and commodities, as shown by comparison with the Thomson Reuters/ Jefferies CRB Commodities Index:-

weekly_blog_140129_03

Aside of the obvious move in lock-step to commodities, the BRICS 50 continues to under-perform against the world index. Furthermore, there remains strong resistance at the red-dashed lines shown.

There may well be a short term bounce on the currency front, which would assist the BRICS, but with central bank tapering likely to continue, particularly as the alpha-dog’s balance sheet is leveraged at 72:1, the pace of tapering may be at a pace not expected.

Either way, the commodity bull cycle appears to have ended and the two indices are now fairly close to testing their respective support shelves, about 8% lower than its current level for the BRICS and 5% for commodities. If these are breeched, then look out below.

The cracks within the BRICS looks set to widen.

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4 responses to this post.

  1. […] Of late we have commented on the correlation between commodities and the emerging markets asset class, including that of the BRICS, which can be found in “Sub-Merging markets,” and “BRICwall Cracking.” […]

    Reply

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  3. […] markets/BRICS: Late January’s “BRICwall Cracking” and February’s “Sub-Merging Markets,” reminded that both sectors had been heading lower […]

    Reply

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