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. Last Updated: 07/27/2016

Just When We're Out, They Pull Us Back In

Wouldn't you know it? Just as Russia began to move in line with global markets -- after three months of going it alone -- the global markets started to tank.

On Thursday, local punters woke up to hear that the big Western bourses had taken some of the worst falls of the year. Both the Dow and the S&P 500 lost 2.3 percent while Moscow slept, and Britain's FTSE saw its worst one-day dive in more than four years, losing 3.2 percent.

Typically, emerging markets reacted in kind, and the MICEX index lost 3.2 percent Thursday and 5 percent for the week, while the RTS lost 2.5 percent that day, sliding back below the 2000 mark that it managed to hold for a meager record of 10 days. The index closed Friday at 1967 points.

Alfa Bank, after predicting the storm since Monday, said the global slump was likely to continue, going as deep as 10 percent. "Credit markets are in turmoil, and that always spells bad news for equities," the bank said in a note to investors Wednesday.

The reappearance of two familiar ghosts set off the anxiety.

The worst of them was the subprime mortgage crisis hovering over the U.S. economy.

For several months, this issue had been largely pushed from traders' minds by a welcome flood of mergers and acquisitions, the value of which has reached $1.5 trillion in the United States this year, more than 50 percent more than the same period in 2006. But housing data released Thursday showed a 6.6 percent drop in new home sales last month, more than 4 times worse than the market expected, reminding everyone that the turmoil on U.S. housing and credit markets had only gotten worse.

As the yen gained 1.5 percent over the dollar, fears also resurfaced that the carry trade in the Japanese currency was being unwound. This signaled to analysts that big funds are paying back their cheap yen loans, which traders often use to place bets on financial markets. Valued in the hundreds of billions of dollars, these loans have been the single biggest source of global liquidity for years, and would spell a global financial drought if traders rushed to pay them off.

On July 20, China set the week's tone for the emerging-market asset class by raising interest rates in hopes of slowing its growth. But the bearishness did not sink into the rest of the Asian markets until Friday, when Taiwan's benchmark index dropped 4.2 percent, and stocks in the Philippines saw their worst daily losses in a decade.

In April, Russia stopped tracking its fellow emerging markets, as worries over politics and hydrocarbons began to push Russia downward away from its emerging-market peers, driving a gap of nearly 20 percent between them. Then this month, it broke from the average emerging market in the other direction, outperforming on news of Sochi's successful Olympic bid.

But last week was clearly the worst one to fall back in line, and analysts said Russia did not deserve to be punished with the rest.

"Russia has been such an underperformer this year, that people have been underweight, especially Russian oil and gas, and they've been thinking when to get back in," said Tom Mundy, vice president of Renaissance Capital in charge of equity strategy.

"They should be buying back in now, but the globals, the macro environment has gotten really shaky."