NY cotton futures ends volatile week slightly lower

The big question is whether this emerging market problem is just temporary or something more serious. It all started last week when currencies came under pressure and long-term bond yields started to rise. Argentina’s Peso dropped by 20 percent so far this month, the most in 12 years, but it has been a global phenomenon, as countries like Turkey, Brazil, Russia or South Africa all saw their currencies under pressure, while interest rates spiked. 

 

It was as if someone had shouted ‘fire’ in theater, as the hot money crowd suddenly rushed for the exit in search of safer havens like the US, Germany or the UK, where interest rates actually dropped as a result of this money transfer. The capital flight forced some EM central banks to intervene and while these interventions may work in the short term, they often scare investors even more, because they are seen as an admission to a problem. Adding to all these concerns are fears of a credit crunch and hard landing in China.

 

Financial markets are largely a confidence game and once fear starts spreading, things can turn ugly in a hurry. We are reminded of the 1997 Asian crisis, which started with the collapse of the Thai baht and then quickly expanded to other Asian economies, as credit bubbles fueled by hot money started to pop.

 

So where do we go from here? Trade shorts have clearly painted themselves into a corner and they keep hoping for spec long liquidation to get them out of trouble. However, if the emerging market situation calms down and specs stick with their longs, we could see an explosive short covering rally one of these days.