MILLBURN, N.J. (Stockpickr) -- Last week, eyes and ears were focused on Europe as the region's banking and sovereign debt crisis continued to send shock waves through global markets. But some of the worst damage over the past week or so has occurred in the emerging markets.
Take Brazil for example. The Brazilian market index, the Bovespa, dropped 6.96% last week. That might not sound so bad given that the S&P 500 dropped 6.54% over the same period, but the Brazilian currency, the real, also declined dramatically, by about 6.6%. Taken together, the total loss in U.S. dollars was about 13.1%. Accordingly, the iShares Brazil ETF (EWZ) declined 12.06% last week.
There are several reasons why the commodity, currency and stock markets in the emerging markets are experiencing weakness.
- The emerging markets are the economic growth engines around the world. In turn, the emerging-market countries rely on that growth, which is derived from manufacturing products for export to the more-established economies such as those in Europe and North America. As Europe faces severe economic problems and as fears of a new recession in the U.S. continue to surface, the emerging markets face a dramatic slowdown in their exports.
- Despite the all-time-low short-term interest rates in the U.S., along with the decline in long-term rates as a result of the Federal Reserve's Operation Twist, the U.S. dollar and U.S. government securities were the subject of a massive flight to quality as global investors rushed to park their money in U.S. dollar investments and fled the euro and emerging-markets currencies.
- Many of the emerging-market nations rely on extractive natural resources such as gold, silver, copper and crude oil to generate exports. As demand for those commodities fell last week and as over-margined traders liquidated their positions, commodity prices denominated primarily in U.S. dollars fell around the world.
- BRIC nations may be starting some trade wars among themselves. Last week, Brazil placed a 3,000-basis-point increase in automobile tariffs. This comes after Brazil jacked up tariffs on steel imports. Presumably, the target was Brazil's largest trading partner, China. Maybe some side discussion between Brazil and China took place this past weekend at the G-20 meeting to calm down these trade issues.
- In the United Nations, a push is being made to press for a vote on Palestinian statehood. Though President Obama and the U.S. will veto any such proposal, the issue is to global emerging markets uncertainty.
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