The Bank Credit Analyst recently opined: "The two key elements affecting the performance of EM financial markets are the U.S. dollar and commodities prices. The combination of a weak U.S. dollar and higher commodities prices is typically bullish for EM. The opposite also holds true: A strong dollar and lower commodities prices are bearish for EM."
My more reserved comments about emerging markets may surprise some of my readers. After all, I have argued vocally over the last two years or so to overweight emerging stock markets based on more favorable valuations and better long term growth prospects than in the US. This view was correct over the last two years and is probably still valid in future, but only in the long term. For now, as I shall explain, dollar strength is negative for emerging markets and for European equities. Dollar strength is a symptom of tightening global liquidity and likely slower global growth ahead.