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Emerging Markets week in review; inflation, sovereign debt in Europe

Emerging markets traders spent much of this week reacting to a steep decline in the Chinese stock market, which is often considered a leading indicator for security prices throughout the emerging world.

 

Still, although the losses in Shanghai were occasionally on the harrowing side, many emerging markets -- notably commodity exporters like Brazil and especially Russia -- came into their own as traders adjusted to the new prospect that inflation is alive and well.

Fear about Ireland needing the European Union to spend $100 billion or more to shore up its finances kept currency markets on edge. Although the dollar seemed technically due for a correction, nervous traders initially piled into the U.S. currency in order to hedge their euro risk. However, by Friday, Irish fears had at least temporarily evaporated, encouraging a new flight back to risk assets like the euro, commodities and emerging currencies.

Brazilian shares were one of the net winners, edging up 0.7%. Traders in Brasilia largely reacted to macro developments, leaving the Bovespa swinging as the risk gauges flipped. Commodity producers, which have more to gain from an upswing in global inflation, fared best.

Russian shares gained 2.8%. Neglected in previous weeks, Moscow welcomed the bulls back with a vengeance. Not only is Russia a center of the global commodity trade -- producing everything from nickel to oil in vast quantities -- but market legend Jim O'Neill gave the market a fundamental endorsement by calling these stocks "cheap."

Indian stocks fell 2.9%. With relatively few strategic commodity plays of its own, Mumbai is largely at the mercy of inflation. Still, if India raises interest rates to fight inflation, it may paradoxically lure yield-hungry capital flows into the rupee, setting off a chain reaction that sends the currency soaring and starves local exporters of their ability to compete overseas.

Chinese markets ended the week down 3.2% after falling nearly 10% in early trading. After coming so close to the precarious technical correction level, Shanghai is still a bit fragile, although many traders have flocked back to the market to grab what they see as bargains. Meanwhile, Beijing plots its next anti-inflationary campaign; moves could include price controls, lending curbs or an outright interest rate hike. 

Disclosure: no positions