Steel (& The Carry Trade): Reflexive Market Duality

Over at thestreet.com today, I'm taking a look at the potential impacts of the recent Asian emerging market mayhem on the price of steel, and what this says for the global economy (Steel Could Be the Next Victim):

Steel's bulls and bears do agree that global interest rate hikes are coming. If the price of steel continues to climb, then a large segment of manufacturing becomes more expensive, potentially resulting in higher consumer price inflation as producers seek to pass along the price hikes. But those who see the price of steel as already overvalued also see this as a consequence of overheated emerging-market economies, which are overdue for interest rate hikes.

"Both China and India have not raised interest rates sufficiently to cool their economies, while infrastructure project demand is still germinating," says Darby.

Furthermore, if global rate hikes are afoot, growth of emerging-market economies would slow, pushing the price of steel down as oversupply in these economies materializes.

It's kind of a rate hike Catch-22, with steel caught right in the middle as both a product and casualty of volatility in consumption, and hence global markets. I would say at this stage steel is in the process of going from becoming a tool by which you can gage market reactions to one which is driving certain market reactions, especially in duality with the yen carry trade. The problem is, it's also - just like the carry trade - reacting to market reactions as well, creating a reflexive tension (and this is why you're seeing so much volatility right now, with the Dow swinging wildly below the 12,000 level intraday for the first time since December today).

More on the carry trade later.