Emerging markets face test

NEW YORK – Commodities had a miserable third quarter and many on Wall Street say they have further to fall. That theory was bolstered last week as oil prices sunk to their lowest level for the year.

If commodities prices do sink further, it will be bad news for emerging markets and the investors who have poured billions of dollars into them over the past three years.

Commodities prices tend to have a domino effect – lower oil prices often drag down gold prices, for instance. And lower commodities prices tend to push down stocks in emerging markets such as Russia and Brazil, countries with a rich supply of oil and metals, respectively.

While many emerging markets continue to be on a tear, if the commodity bears are right, there may be plenty of pain to spread around.

Stephen S. Roach, Morgan Stanley’s chief economist, wrote in September that the tidal wave of money that has flowed into commodities over the last three years has transformed commodities markets “from one of the best real-time gauges of economic activity” to a financial asset like any other – that is, one that’s susceptible to hysteria and bubbles.

“Just as return-hungry investors chased these markets on the upside, they could well run like lemmings to get out on the downside,” Roach wrote.