Commodities rout will fuel EM concerns and volatility

Significance

This drop has taken oil into its second bear market in the space of just over a year amid a broader rout in the prices of commodities, notably copper and gold. The commodity sell-off is fuelled by mounting concerns over the economy and financial markets of China, the world's top crude importer and its largest energy user. The sell-off is exacerbated by fears over the fallout from a US interest rates rise, which could come as early as September. Country-specific risks are weighing on emerging market (EM) assets, notably the currencies of large commodity exporters such as Brazil and Russia.

Impacts

• The sharp fall in commodity prices will exert further downward pressure on inflation in both emerging and advanced economies.
• Re-emerging disinflationary trends will bode ill for the ECB efforts to boost inflation in the euro-area.
• The commodity sell-off will exacerbate economic and political crises in Brazil and Russia.
• The EM currencies fall is forcing many central banks to signal an end to monetary easing or to tighten policy.