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It has been awhile since we have used this word, however, capital market seems to have decided they want to dust it off and bring it back. Expect this word to be used more in defense of last weeks late market meltdown. Many have been hesitant to use the word to describe both Thursday's and Friday's market moves. Why? The word typically refers to a financial shock in a vulnerable country that spills over into previously healthy economy. And that is what is happening – almost all emerging market currencies are falling against the dollar – and investors are worried about the domino effect. If the sell off escalates, similar to last August and September in Asia, then the compounding effect will be similar – the masses will run hard to the exits.

All of this is occurring only one day after the International Monetary Fund (IMF) released its revised global growth forecasts. IMF chief, Christine Lagarde, and her crew raised growth estimates for Japan, Europe, and the U.S., but reduced them for Latin America and Russia. Growth in the developed world is stabilizing, but not so in emerging markets. It seems that the gears of the global economy are shifting, and they are increasingly shifting toward instability in the developing economies.

Investors have taken cash from emerging Asian stock and bond funds for the eighth consecutive week as of January 22 according to EPFA data. A total of $1.4-billion left funds, more than twice the $671-million of the previous week.

Source: Week In FX Europe - Contagion, Contagion, Contagion