NEW YORK (
) -- Don Dion posts his current insights on the stock, bond, commodity and currency markets in his
blog, anticipating which ETFs will be in play next. Among his blogs this week were the following, in which he wrote about caution signals for emerging market currencies, John Paulson's plans to set up a gold fund and what it means for gold investors, and the short-term weakness in the financials.
Caution Signals for Emerging-Market Currencies
Posted 11/20/2009 2:36 p.m. EST
The discussion and implementation of capital controls is a barometer for the currency market, and investors in emerging-market currency ETFs should take heed.
In the past month, Taiwan moved to block hot money from sitting in time deposits, and Brazil initiated a tax on foreign equity investors.
Hong Kong reports that in the six weeks between Oct. 1 and Nov. 13, close to $75 billion flowed into the country. To put that in perspective, Hong Kong's GDP was $215 billion last year. Stock market capitalization exceeds $2 trillion, but 50% of the market is made up of Chinese firms. Hong Kong's government is concerned about the huge inflows, and it is not alone.
also reports that, "Officials from India, South Korea and Indonesia are among those expressing concern over overseas capital stoking stock and real estate prices."
These nations remember the 1997 Asian crisis well and do not want to suffer a repeat. The main focus of their concern is the ultra-low interest rate on the U.S. dollar that is fueling the carry trade. Emerging markets are seeing increases in asset prices along with their currencies, and it may eventually cause global imbalances that will be corrected via another currency crisis.
While emerging-market equities still have room to advance, the easy currency gains are gone. It's impossible to know when the current currency trends will end, but the growing concern from South America to Asia is a sign that we are entering the middle phase of the current rally. Note that the policies are unlikely to change the market; rather, by the time the slow-moving governments finally act, the market has already shifted.
Investors in emerging-market currency ETFs, such as
WisdomTree Dreyfus Emerging Currencies
do not need to sell now, but I would not add new positions.
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