Emerging Markets And Commodities...

Yesterday, we witnessed the first major hiccup of 2006 in the 2 most sensitive (to carry) asset classes -- emerging markets (FX) and commodities (base and precious metals). If you were long any of those, you experienced some serious pain, as there was a general risk reduction going on in the market, which ended up shaking a few of the very popular "hedge fund trades" -- the so-called carry trades. I continue to believe that the end of ALL carry trades is nigh -- it will probably start (and some may argue that it already has) with account deficit countries such as Iceland, and eventually make its way toward pretty fundamentally strong economies (with account surpluses) such as Brazil. It's just a matter of time.

Equities are ploughing along happily for now -- I am still very near-term bullish, but as usual, equity investors will be the last ones to feel the pain inflicted by other asset classes. So all is alright for now, but prepare for pain later on next quarter.