October 20, 2009

Commodities on the run

Oil prices went above $80 a barrel today, a new high for the year.  Meanwhile US producer prices declined by 0.6% in September. 

Speaking of of hot commodities, a commodity driven currency, the Brazilian Real may have seen the first set of measures intended to slow down a further rise in the currency.   Starting today, the Brazilian  government imposes a 2% tax on money entering the country to invest in equities and fixed income instruments.  

On first glance, this appears to be an effective deterrent which may slow down the rise of Brazil’s currency.  Indeed, the Brazilian Real fell about 3% today and Brazil’s benchmark stock index fell over 8% on the news. 

However, one would imagine that in view of limited alternatives in terms of high yielding assets, smart money might just find ways to circumvent the measure through direct foreign investment or other investments in underlying assets.   One note of caution though: The new measure makes investing in Brazil very much like investing in a hedge fund and extra care has to be taken as to possible implications by this tax.  Investing in hedge funds bears additional risks. In addition, the higher effective cost right from the start should make investors think twice before entering into such investments, no matter how lucrative returns may be from the outset.

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