Why Brazil, Other Emerging Markets Hold Huge Risk For Metal Prices

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With Turkey’s account balance and Prime Minister Erdogan’s political career not looking so hot, and with Kirchner’s Argentina battling inflation, emerging markets don’t appear to be all that healthy at the moment.

Brazil’s Cup Doesn’t Overfloweth

soccer player kicking high

Not helped by Argentina’s ills, neighboring Brazil has mounting problems too, which no amount of razzmatazz around the forthcoming FIFA World Cup and Olympics will dispel.

Argentina is Brazil’s biggest export market for manufactured goods. Dependent mostly on internal consumption and with reserves of about $375 billion, Brazil has considerable leeway to manage shocks, the FT observes. When the Brazilian real started to depreciate rapidly last year, the country responded with a $60bn currency intervention program; it is now raising interest rates to try to support the currency, already at 10.5% and rising, hence the outlook for Brazil’s manufacturing sector is not good.

Yet in spite of the real depreciating some 18% in the last year, imports are rising and exports are falling. In fact, the country just posted its highest-ever trade deficit in January.

What This Means for Metal Buyers

Do all of the issues in Turkey, Argentina and Brazil – and problems in places like Russia and India – directly impact metals markets?

Even though an implosion (as we have seen in Argentina in the past or in Asia in the 1990s) does not materially hit supply, it does impact sentiment, risk appetite, and global investment.

It certainly impacts prices, as we have seen in recent weeks, with falling commodity prices and a retrenchment in investors’ appetite for emerging market assets. Metals prices have fallen as markets have perceived that slowing growth could mean lower demand. The sudden impact of a financial crisis in one of these emerging markets is what is spooking the market and that very nervousness is making it harder for those markets to fund their overseas debts and attract inward investment.

The prophecy can become self-fulfilling in the absence of any good news, such as a halt to the Fed’s tapering. Recent manufacturing data for the US may encourage the Fed to continue at the current level for some time, but no one is fooled.

Sooner or later, the sugar rush is going to be closed off – and then the frailties in some emerging market economies could cause considerable volatility in metals prices.

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