Thomson Reuters
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- Commodity prices, the dollar, and US interest rates are all rising, and this trio is unsustainable, according to Goldman Sachs' commodity strategists.
- They said in a note Wednesday that emerging markets could come under even more strain if this trio persists, as investors rotate more money into the US.
- Also, the dollar will likely weaken from here, they said.
Unfortunately, you can't always have it all, especially in markets.
Goldman Sachs' commodity strategists have pointed to a trio of ongoing factors: rising interest rates, rising commodity prices, and a stronger dollar.
"Past periods of this trio have been short-lived and usually followed by slower growth," Jeff Currie, the global head of commodities, said in a note on Wednesday.
That's because higher interest rates and a stronger dollar could trigger more inflows into the US, straining emerging markets even further. This year, investors have already pulled money out of assets in countries from Brazil to Italy amid geopolitical turmoil and the increasing appeal of dollar-denominated assets. Investors have pulled $11.5 billion out of emerging-market funds this year, BAML said. The Brazilian real is down 20% this year, and only three out of two dozen emerging-market currencies tracked by Bloomberg are up year-to-date against the dollar.
Some of that capital has flowed into Treasurys and cash, according to Bank of America Merrill Lynch.
As US bond yields rise, some of the shortest-dated bonds are yielding more than many stocks and have become an alternative to investors looking for yield in riskier markets. Investors pulled $29.28 billion out of US stock funds and exchange-traded funds in the week ending on June 27 - the second-largest outflow this year. Outflows from emerging-market bonds also increased as investors rotated into cash and US Treasurys instead, BAML said.
"If this [trio] persists, the current EM problems would likely intensify, so something has to give, which is likely the dollar as EM growth recovers."
Goldman Sachs
The fallout of this trio giving way won't mark the turning point of the cycle, but a pause, Currie said. That's because long-term US yields have not yet fallen below short-term yields - a so-called yield curve inversion - which happened during prior turning points.
Also, commodity prices, which many emerging-market economies are sensitive to, still has room to fall unless a geopolitical event disrupts supply, Currie said. In the meantime, Goldman's strategists are still bullish on commodities as an asset class that should benefit from late-cycle demand.
"The key is that the trio of higher rates, stronger dollar and rising commodity prices creates too much pressure on EM, particularly those short oil, which is why these periods don't last long and lead to events such as the trucker strike in Brazil last month - oil denominated in BRL was the highest on record," Currie said.
Besides the strain on emerging markets, Currie said the dollar's strength could also give way if this trio persists. Because oil prices are denominated in dollars, a stronger USD makes it more costly for holders of other currencies. That's why rates, oil, and the dollar all heading in the same dollar is unsustainable, in Currie's view.
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