Global sell-off worsens on flight from emerging markets
The flight from emerging markets deepened on Tuesday with Indonesian stocks falling a further 4.5 percent to enter bear market territory and India's rupee falling to new record lows against the dollar. Turkey's central bank hiked interest rates by a surprise 50 basis points as it tried to stem the decline in the lira.
European stocks also experienced broad declines and analysts said there would be no let up in the correction until the Fed provides further clarity on its bond-buying policy.
Since last week, global markets have traded lower on fears that the Fed will start to taper its bond purchases as early as September. On Monday, the Dow and S&P 500 logged their first four-day losing streaks this year and 10-year Treasury yields hit a two-year high of 2.88 percent.
(Read more: Bond exodus accelerates as yields creep nearer 3%)
Adding to the gloom on Tuesday were weak results from mining giants BHP Billiton and Glencore Xstrata. Both stocks fell over 3 percent on Tuesday and investors sold other resources stocks that have benefited from emerging market growth.
"This simply doesn't look like a market that is going to see lower yields, at least without some serious verbal intervention from the Fed," Chris Weston, chief markets strategist at trading firm IG told CNBC on Tuesday.
(Read more: September or December taper-does it really matter?)
According to him, emerging markets had seen inflows of an estimated $4 trillion from successive rounds of Fed easing but that was now being "unwound at a rate of knots."
That outflow of money has hammered emerging market currencies. India's rupee has declined 15 percent since the start of the year against the dollar, while Brazil's real has fallen by 18 percent.
"Countries that have reasonable levels on inflation, run large current account deficits and continue to face worrying capital flow prospects are getting absolutely destroyed and remain vulnerable," Weston said. The underperformance was likely to continue as the starting point of Fed tapering nears, analysts Hamish Pepper and Koon Chow at Barclays said on Tuesday.
The next Fed policy meeting is in mid-September but investors will study Wednesday's release of the minutes from the last policy meeting for signs policymakers are preparing to scale back stimulus.
"Market participants do not want to get caught out on the wrong side if tapering does indeed start in September – that's why we are seeing many in the market tinkering their portfolios to react favorably to tapering [i.e. dumping emerging market assets in favor of developed market assets] – expect this to be the theme until the Federal Reserve's next meeting [in September]," Ishaq Siddiqi, a market strategist at ETX Capital said.
"There is growing concern that capital outflows from emerging markets will rapidly accelerate," Siddiqi added. "Investors would rather pile into growth-focused assets geared to the U.S. economic recovery."