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Emerging Markets Sink into Bear Market
The emerging market equity benchmark has plunged nearly 20% since the beginning of the year, sinking into a bear market territory. Typically, bear markets start when there is fall of at least 20% from the highs. The MSCI Emerging-Markets Stocks Index has had its longest losing streak in six months.

Many of the emerging market currencies are feeling the contagion effects after the Turkish Lira crashed to an all-time low. The Iranian Rial, Russian Ruble, South African Rand, Indian Rupee and Chinese Yuan have continued to weaken against the greenback. The US sanctions are producing a very material impact across all emerging markets.

The Turkey crisis is encouraging a preference for safe haven currencies, aka the US dollar, to the detriment of emerging markets, often used as high-yield carry currencies. Many of the high yielding currencies have reached their all-time low. However, in the short-term the emerging market currencies have managed to pare some of the previous losses.

The turmoil in the emerging markets would likely only spillover to developed economies if the trade wars do too. That would mean the US and its main trade partners in Europe and Asia turns into a full-blown trade war. For the time being, emerging markets will be more sensitive to trade war rhetoric.

Source: Trading View, 17/8/2018

While the EEM ETF is trading near a 13-month low, the US stock-indices are close to new all-time highs. At the same time, the volatility index on emerging markets is showing a relatively low reading, making the case for the current turmoil to stabilise.

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