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Emerging Markets Drop Anchor

|Includes:VanEck Vectors Indonesia Index ETF (IDX)

Global stock markets are being pulled lower by emerging crises in emerging markets. Currency and stock market declines in India and Indonesia have rattled the region and initiated discussion of whether another emerging market crisis is on the way. With U.S. stocks in a consolidation phase during some of the slowest trading days of the year, they too are being pulled lower.

Indonesia saw its stock market plummet 15 percent over a one month period stretching from the end of May into late June, with the bulk of the losses coming in the first two weeks. After recovering about 40 percent of those losses, the Indonesia market has lost more than 10 percent in the past week, along with seeing its currency decline in value. An ETF that tracks the Indonesian market, Market Vectors Indonesia (NYSEARCA:IDX), was down 18 percent in the week through Wednesday.

India is in a similar situation, although it's market recovered all its losses from June by late July. Since then, the Indian stock market has fallen more than 10 percent. Since May, the currency has seen a non-stop decline, losing 15 percent versus the U.S. dollar. The combined losses have most India funds down roughly 25 percent since May.

While these declines are large, they aren't shocking for volatile emerging markets. What has investors concerned is that these losses are just the beginning of a much larger decline. We have seen this cycle play out before, with the 1997 Asian Crisis and the 2008 financial crisis both coming in the wake of huge credit bubbles. Emerging markets have once more relied on credit growth, including China, but these cycles have reached their natural end. Additionally, the Federal Reserve is considering a reduction in asset purchases, and most of the Federal Reserves asset purchases ended up flowing into Asia through hot money flows. Speculators are reassessing their positions and at a certain point, it may not matter what the Fed does, if the markets dislocate enough to cause the herd to shift out of Asia.

Still, European markets pushed higher today and U.S. markets have become oversold. Capital flowing out of Asia in 1997 contributed to the strong bull market in U.S. stocks and with the relatively insulted domestic U.S. economy (one of the positives of having a large trade deficit) still on the mend, the U.S. will benefit from Asian instability. Even if we see a wider panic and crisis develop in Asia, the U.S. will most likely only see a short-term disruption in the bull market. Particularly because if events deteriorate into September, the Fed will delay its tapering, and that will provide a bit of relief to markets across the globe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: IDX