The same holds for the dollar/yen relationship. The yen is again near its highest levels in a month against the dollar; that relationship has moved almost tick for tick with the S&P 500 recently, showing that the market is still very dependent on liquidity that the yen carry trade provides.
I just returned from the etf.com Inside ETF conference in Florida, where the discussion among the investment advisors and ETF providers was largely about the turmoil in emerging markets.
In the seminars, much of the discussion was historical: this is a classic Emerging Market crisis. Countries that have notable current-account deficits sell their reserves of foreign currencies to prop up their own currencies.
When that doesn't work, they raise rates (Turkey and South Africa this morning, following India), trying to keep money in their country. However, it's tough to do that short-term, as once money starts to come out it doesn't just stop on a dime.
The irony, of course, is that bond yields have been declining in both Europe and the U.S. as the money comes out of emerging markets and into the world's largest economy, while yields have been rising in EM countries. In a perfect world, this would attract flows in the other direction.
This, however, is far from a perfect world. We have all become behavioral economists now, and the fear of big losses overseas is much greater than the prospect of marginal gains by staying overseas. When the Turks raise their overnight lending rate from 7.75 percent to 12 percent, it may help stabilize the currency but it does not exactly foster growth.
And what about prospects for the Federal Reserve's taper? Many traders I have spoken to support continuing to taper, but they think pulling back on bond purchases means growth will slow. Therefore, they are selling in anticipation of the fourth quarter being the high growth print for the cycle.