Wednesday, July 17, 2013

Brazil as a proxy of global growth

Regular readers of my commentaries know I've been fixated on the reflation trade and the prospects that the deflationary juggernaut that central banks have attempted to bury with reams of fiat money will begin to dominate the global financial scene.  I've also attributed the recent slide in emerging markets to this thesis. 

Brazil, like many other emerging market economies, has it's own internal problems, but being a resource based economy, it has been a victim to the threat of Fed tapering and the subsequent rise of the US Dollar.  And this has threatened to strangle its economy.  Here's a weekly chart of Brazilian Bovespa Stock Index:

(click on chart for larger image)

Technically, we're seeing a bounce off of Fibonacci support at the 61.8% Fibonacci level which may be speaking to the correction in Emerging Markets being over.  However, this is still an early call.  The "verdict" is still out ...

A turn in Emerging Markets is predicated two variables:

1) a recovery in the major consumer based economies in the west, particularly the Euro zone.

2)  a stable unwind of Fed QE.  A stronger $USD, the result of the recent rise in interest rates because of the prospect of Fed tapering, is extremely deflationary in a sickly global economy.  The reduction of cheap money that has been the growth catalyst for these economies since the GFC (Great Financial Crisis) cannot bode well for their short to intermediate term prospects.

In many ways, the FOMC holds the fate of the global financial system in its hands and will need all the finesse it can conjure up to extricate itself from the unprecedented monetary stimulus it has pumped into the financial system.

I'll be addressing the many variables that could come to bear as a result of the QE unwind in future posts.

This is my commentary for this week.  Taking a bit of a vacation but will be "tweeting" when I can or posting a chart or two here or there ...  I'll be back with a full commentary on July 27th.

Have a great weekend!