Moment of truth as transports decouple from oil prices

We are starting to see correlations break down between the formerly locked “risk” asset classes of oil and emerging market stocks. The danger here seems to be that crude prices are already getting ahead of what inflation-wary central banks can handle.

The Dow transports (IYT, quote) dropped 1.5% yesterday as Brent crude (BNO, quote) moved in the opposite direction.

Brent has soared above $120 a barrel in recent days — largely on the back of looming interruptions to  Iranian exports — and few see it coming down for anything but a full-fledged recession in Europe, China or both.
In the last few months, the euro zone’s tribulations have forced traders into a lockstep mentality where good news from Greece meant continued economic strength in Europe, which meant continued demand for factory output, which meant robust consumption for oil and other key materials.
Bad news from Greece, on the other hand, drove traders out of the oil markets and the economically sensitive stocks of the emerging world.
Now, however, we are at a moment when everyone agrees that the long-term fundamentals for oil are not changing. Whatever happens in Europe, the basic supply/demand equations have reached a point where oil prices are finding support.
The prospect of war in the Persian Gulf naturally makes things worse by potentially depressing the “supply” side of the equation.
Sooner or later, as they say, the tide of oil stops lifting all boats and becomes a drag instead. 

Consumer stocks are already retreating here along with transport stocks, which naturally suffer immediately as fuel prices climb.
Turkey cannot handle $125 oil. Neither can India. Neither can China. 
Between them, that’s 33% of the EEM (quote) right there.
This bears watching. These countries have all finally managed to get domestic inflation under what passes for control. Importing a surge in fuel costs will unravel any attempts to create stimulus they now have on their respective tables.

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