Russia and Brazil crumble as commodity prices crash

Russia and Brazil crumble as commodity prices crash

[link to www.telegraph.co.uk]

The entire complex of commodities and emerging market stocks, bonds, and currencies is now in free-fall as the economic crisis spreads like brushfire, threatening to draw every corner of the globe into the vortex of recession.


Oil, grains, and industrial metals all crumbled as the week began despite the passage of the Paulson bail-out plan in Washington and dramatic moves by European governments to shore up their banking systems, compounding the steepest commodity crash in over half a century.

The big exception yesterday was gold, which surged $34 to $864 an ounce on safe-haven buying as the markets came face to face with the unsettling reality that the euro is no healthier than the dollar, and perhaps sicker.

The euro’s dramatic slide over the past two weeks has for the first time exposed the instability of the twin-pillar system holding up global finance.

Hans Redeker, currency chief at BNP Paribas, said investors fear that no one is in charge of Europe’s monetary union. “Who is Mr Europe? What is his telephone number? There is no such thing. We have a cancer eating at the system because even healthy companies cannot roll over their debts, yet the politicians still don’t understand the risk,” he said.

The sudden shift in commodity sentiment has led to a massive withdrawal of funds from frontier markets, triggering stock market routs across Latin America, Asia, and Eastern Europe. The MSCI index of emerging markets fell 11pc yesterday in its worst day ever.

Russia suspended trading after Moscow’s Micex index crashed 19pc in its biggest one-day drop since the 1998 default. The state-controlled VTB bank fell 25pc.

“Traders are just sitting there staring at the screens and going, 'Wow’,” said Ron Smith, a strategist at Alfa Bank.

Brazil shut the Sao Paulo exchange after the Bovespa index crashed 15pc in panic trading, led by flight from the resource giants Vale and Petroleo Brasileiro. Mexico’s Bolsa was off 7pc; India’s Sensex was off 6pc.

The Goldman Sachs Commodity Index has tumbled a third since May. Chartists say it is now perched precariously on its seven-year line, threatening to challenge the “supercycle” thesis that became so fashionable at the top of the bubble.

“The boom was fuelled by massive speculation,” said Charles Dumas, chief strategist at Lombard Street Research.

“Commodity derivatives in the spring had a face of $10 trillion, so it doesn’t take many bulls to sell and send prices crashing. Remember all those clever bankers saying this was the new investment medium, 'uncorrelated’ with either assets? Well, it’s correlated now – downwards,” he said.

The Australian dollar, the beacon of commodity sentiment, went into near-meltdown yesterday, dropping 9.7pc against the yen in the largest one-day drop on record as Japanese investors dumped their Uridashi bonds and scrambled to close bets on high-yield economies – known as the carry trade.

Brent crude oil fell to $85 a barrel, down over 40pc since the July spike. It is a casualty of the synchronised recession engulfing the entire G7 bloc of leading powers.

Japan and the eurozone are already contracting: the Anglo-Saxon economies are close behind. The new twist is an abrupt downturn in China, until now the dominant force in the oil and metals boom.

Albert Edwards, global strategist at Société Generale, said China depends on exports to US and Europe for its lifeblood, and could face banking problems of its own.

“I think China is going into recession as well. This is going to catch investors off-guard.”

Stephen Jen, currency chief at Morgan Stanley, said the “glowing reputation” enjoyed by emerging markets during the global boom was a deception caused by the easy-money largesse of the credit bubble. Strip that away, and the picture looks very different.

“They are very vulnerable to a U-turn in capital flows,” he said.

The oil slide has reached the point where it is setting off a powerful chain reaction through the nexus of global markets. It may soon be unprofitable to divert much of the US crop harvest to biofuels, so futures contracts are rapidly scaling back assumptions. Corn fell 6.4pc yesterday, while soya beans were off 5.4pc.

There are fears that Russia could slip into a downward spiral if oil drops to $50 a barrel, which is now the lower end of Merrill Lynch’s forecast.

Moscow has become addicted to the oil bonanza, ratcheting up spending so quickly that it may now need prices to stay above $90 to fund spending plans. Veteran analysts say they have seen this movie before.