"The Very Definition Of Contagion": Catching Falling Knives In Emerging Markets

Don't look now - or look - but while the US stock market trades just shy of all-time highs, absent the occasional hiccup in the mighty FANGs, the route across emerging markets is now the longest since the global financial crisis, or specifically 222 days for stocks, 155 days for currencies, and 240 days for local government bonds.

The duration of each selloff - as calculated by Bloomberg - had taken even the most ardent bears by surprise because "not one of the seven biggest selloffs since the financial crisis - including the so-called taper tantrum - inflicted such pain for so long on the developing world".

(Click on image to enlarge)

The slump and the duration, calculation in the number of days from peak to trough, has pushed some strategists to say the EM crisis is more than just a knee-jerk reaction to higher U.S. interest rates or the unfolding trade war: "It’s become a full-fledged crisis of confidence for investors in developing nations."

The duration of the decline also impacts trader behavior, as lingering downtrends upend futures and options contracts, forcing traders to take losses. They also lock up investors’ collateral in the form of enhanced margin calls, leaving them little room to make other trading decisions, as Bloomberg notes.

More importantly, the longer selloff also means the argument for buying the dip - one frequently made by money managers earlier this year - gives way to cautions over avoiding a falling knife.

And that, in turn, can persuade money managers who treat emerging markets as one homogeneous group to sell weak and strong markets in tandem, no matter their specific fundamentals. It’s the very definition of contagion.

One strategist who would agree with the gloomy assessment that the EM crisis is in its contagion phase, is Macquarie's Viktor Shvets who in a note released today, titled appropriately "Catching falling knives & EM contagion" explains - once again - what prompted this particular EM crisis, and why it will be so difficult to exit it.

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