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What's behind the panic with emerging markets

some ominous economic ripples have investors on edge
some ominous economic ripples have investors on edge
Photo by John Moore/Getty Images

A weak PMI report from China sent markets tumbling Thursday, by Friday the news spread around the rest of emerging markets around the globe. The PMI or Purchasing Managers Index is a survey of manufacturing in the private sector. Some of the findings the index highlights is how many goods are being produced and how many new orders are coming in. The results of this months Chinese survey came in at 49.6 or sub 50. The sub 50 is notable because that is the benchmark indicating that there has been a contraction in activity for the month.

After the news on Thursday, Hong Kong's market, The Hang Seng fell 540 points. That decline was parallel with the Dow which saw a 175 point drop.

On Friday, contagion in the world markets continued as the Dow saw a 318 point selloff. In Asia, Japan's Nikkei dropped 304 points and The Hang Seng this time only shaved 1.3% or 283 points of their price.

The negative effect from weak data coming from China simply highlights the fact that the worlds economy is very much a highly systemic body that is very fragile to ripples in the overall economic system.

This is because PMI data coming from China emphasizes another ominous data point, that is of the debt market spread. What is the debt market spread and why is this so detrimental for emerging markets?

The debt market spread, which is also known as the credit spread or yield spread is basically the difference an investor stands to gain from investing in high risk securities vs investments of lower risk, i.e. bonds and mutual funds.

So what does China's PMI index and the falling value of emerging market currencies have to do with price of tea in the U.S.? To put it in simplest terms everything, or to put it another way, they are one in the same. That is because when one sector is being artificially propped up by a another's federal bank they develop a symbiotic relationship with each other. So when the head of the United States Federal Reserve says that enough progress has been made in the U.S. economy and he is going to begin tapering his massive stimulus program, then certain economic relationship are implied. One of them is that interest rates may rise which would take pressure off of investors from having to make money in high risk ventures.

In a global economy, high risk ventures are found in emerging markets. These markets are found in countries like Turkey, Brazil, Argentina, Ukraine, and of course China.

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