It’s a small world after all:

The last week has really brought this statement to mind as the entire worlds equity markets react in concert. The global central banks have been focused on the increasing inflation pressure from higher energy prices. This inflation concern is causing the central banks to increase interest rates in an effort to reduce demand and slow economic growth.

It is interesting to see the reaction as investors move out of the commodity stocks on fears of a global slowdown. In many sectors the commodity prices were pushed well beyond their fundamental values due to hedge funds plunging into the metals and energy sectors.

The hedge fund industry has boomed over the last few years as they have been able to borrow in Japan with no cost and buy in North America reaping the benefits of cost free leverage. Now that Japan has signaled an end to the Zero Interest Rate Policy in the near future these hedge funds will no longer be able to leverage their portfolios with as much ease. The fall out of this has been a reduction in the amount of capital available to support markets in North America and to an extent Europe as well.

The current correction still has some downside but over the next few weeks there are likely to be some very interesting opportunities in the commodity producers such as base metals and precious metals.

Global demand may slow over the next year mainly in North America and Europe but the growth in Asia appears to be sustainable over the long term and this is region the commodity producers are leveraged to. It would seem prudent in the short term to wait for the markets to settle down a little before moving back in to equities.