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TheStreet Open House

Central Bank Uncertainty Threatens Emerging Markets

Stocks in this article: DBC EEM

NEW YORK ( TheStreet) -- Commodities markets broadly sold off on Wednesday due to the uncertainty over the course of action in central banks of developed economies.

The Federal Reserve left markets with a dovish tone at its policy decision last week. Since the event Fed board members have come out and hedged their statements by claiming to be hawkish as well, setting their sights on policy tightening before year's end. Ben Bernanke has tried to maintain a balanced approach while figuring out how to rein in the Fed's record high balance sheet. Keeping investors in the dark while being completely transparent looks to be doing the trick.

Similarly, the Bank of Japan rattled markets recently as their commitment to stimulus has been called into question. They too have set out to balloon their central bank's balance sheet in order to elicit growth in investment for their economy. This initially led to the deterioration of the yen's value, but more recently uncertainty over the policies validity has pushed demand back into the currency. If Japan cannot keep its debt to GDP in check then it runs the risk of scaring off investors and pushing the borrowing rate to unsustainable levels.

All of this ties into the fear that the rest of the world suffers with regards to global demand. If major economies are dysfunctional, then the trickle down to emerging economies will have its consequences.

The chart below is of PowerShares DB Commodity Index Tracking (DBC). Commodities have borne the brunt of waning global demand expectations. Countries such as Australia have lowered their cash rate in order to ease the pain of lower commodity prices.

If major economies are not producing enough output and instead clinging onto growth to avoid recessions, demand will not show a sustainable improvement.

Continued uncertainty over monetary policy in major economies will weigh on global asset markets.

On the same note, iShares MSCI Emerging Markets (EEM), which bears a similar price action to that of the commodities chart above, has seen a strong sell off due to similar uncertainty.

Emerging market equities have rolled over slowly after bouncing back from its June lows. The initial reaction to U.S. policy tightening and a stronger dollar was to selloff.

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