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. Last Updated: 07/27/2016

Chinese Scare Sends Market Into a Tailspin

An unforeseen trigger from China sent emerging markets into a tailspin this week, revealing the frailty of Russia's growth and the fallibility of its forecasters.

As of Wednesday's close, the RTS had lost 6.6 percent and the MICEX was down 7.1 percent, in both cases the biggest falls in five months.

The RTS was dragged down by losses for blue chips Sberbank (5.8 percent), Gazprom (7.5 percent), LUKoil (6.4 percent) and Unified Energy Systems (8.5 percent).

Moscow banks Monday morning had sent out market notes with bullish forecasts. Many argued that an oil price recovery and signs of growth in the metals sector would push the RTS index above the milestone of 2,000 points this week.

They were wrong.

Their logic in hindsight was somewhat scattered, but the consensus placed initial blame for the downturn on Chinese officials, who were reportedly planning steps to cool off their overvalued market. This led to a 9 percent drop on the exchange in Shanghai, which portfolio investors lump together with Moscow in the emerging markets category. A global sell-off of these risky markets ensued.

The panic spread on Monday to the United States, fanned by signs of a recession. Sales of U.S. durable goods, such as cars and heavy machinery, were much lower than expected, with the headline rate down almost 8 percent.

Former Federal Reserve chairman Alan Greenspan weighed in on Monday, saying the U.S. economy looks to be headed toward recession this year, and investors seemed to believe him.

"Greenspan couldn't have picked a worse time," said Alfa Bank strategist Erik De Poy.

In the first two days of this week, the Nasdaq Composite Index dropped by 4.2 percent and the S&P 500 by 4.5 percent. The Dow Jones Industrial Average fell 3.3 percent Tuesday -- its worst daily fall since Sept. 17, 2001, when the exchange had a torrid reopening after the terrorist attacks on New York and Washington.

De Poy said these U.S. trends would determine the fate of Russian markets and could continue to drag them down if they continue.

Renaissance Capital analyst Ovanes Oganisian said the liquidity on global markets, including in the United States and Japan, would make the difference.

"It is a very important moment for investors to understand that if liquidity will be limited it will directly affect various sectors in many countries," Oganisian said.

But De Poy and Oganisian agreed that the reasons for the slide were "psychological," and did not represent a fundamental overheating of emerging markets.

Oil and gas prices tend to either buffer or exacerbate the volatility on foreign markets. If this correction leads to a slowdown in the Chinese economy, oil prices are likely to fall, dragging Russia's biggest blue chips down, Alfa Bank said in a note to investors.

Gold this week has been among the hardest-hit commodities, paradoxically, because it is a favorite haven in times of crisis. The fact that it dropped -- about 3 percent Monday in New York for April delivery -- testifies to how much money people are losing, as they are forced to sell off their safest bets to settle their trading elsewhere.