"It hasn't been a day about the data or anything more fundamental for the U.S., outside of a continuation of the rethinking of the Fed. I think that the Fed minutes have gotten us into questioning the assumption of a September rate hike. We've seen that largely priced out of the market. We've seen global equities under pressure, as well as domestic equities under pressure. With risk assets coming off, there's been a relative flight to quality," said Ian Lyngen, senior Treasury strategist at CRT Capital.
Strategists said that while talk touched on the Asian currency crisis of 1997 and the 1998 collapse of the Long-Term Capital Management hedge fund, that was a different era and markets are far from experiencing what led to that type of meltdown and calamity. At the time, the currencies of emerging markets in Asia were pegged to the dollar and those countries were saddled with dollar-denominated debt.
"You don't have those same preconditions where everyone was on one side of the market, and everyone was feeling you've got to head to the doors now," said William Lee, head of North America economics at Citigroup. "Without that kind of disorderliness, the Fed will keep its nose to the grindstone." He still expects the Fed to raise rates in September and believes the market response to the minutes has been wrong.
Traders around the street are watching a continued collapse of currencies in the emerging world, with some like the Turkish lira, Thai baht, Brazil's real and Malaysian ringgit all down more 8 percent in the last month. The worst performer is the Russian ruble, down 17 percent. Those currencies have been moving lower against the dollar, as the greenback firms on the idea that the Fed is moving toward higher interest rates.
Bankim Chadha, global strategist at Deutsche Bank, also agrees current market conditions are nothing like the late 1990s. "The most important difference is we're in 2015 and EM basically peaked in 2010. It's basically coming on the five-year anniversary, so it's massively underperformed already. You have to keep in mind that most of the crises in the past have come from unhedged currency exposure. If there is a crisis, it would be a crisis of exhaustion not because someone has unhedged currency exposure," he said.
The S&P 500 fell 2.1 percent to 2035, wiping out what was left of its 2015 gains, and the 10-year Treasury yield was around 2.07 percent. The 2-year yield was slightly higher, holding its own at 0.66 percent. That is the duration that most reflects the potential for Fed easing. Futures, however, signaled little chance the Fed would raise rates in September and traders put the highest odds on a first rate hike in January.
"I think the market reaction is understandable and is in the right direction, but I think it's overdone," said Michael Hanson, senior economist at Bank of America Merrill Lynch. "The rates market is extrapolating a couple of things. Everything that could go wrong in the U.S. economy and the world economy is somewhat priced in to the rates market. There's lots of medium-term pessimism embedded there." He said the equity market has been nowhere near as pessimistic.
"I think the rates market is just barely pricing in one hike this year, and the forward path of rates that's implied in the futures market ... is the market saying to the Fed: 'We don't think you're going to be able to hike as fast as you're saying,' " said Hanson.
As investors moved to the safety of Treasurys, they continued to unload high-yield corporate bonds Thursday, and the most pain was in energy. As of Wednesday afternoon, energy high-yield debt was 40 basis points wider than it was Friday, compared to 16 basis points widening in the same time frame for high yield overall, said one trader.
Chadha said the commodities markets are in a steep correction but he does not see it is a signal for global recession, and not all emerging markets are impacted by it. Strategists say Chinese demand is also a factor for commodities and oil, in particular, is affected by oversupply.
"Mostly it's a big valuation issue. They've been falling since late 2011, 2012. I don't think there's anything new here. I would tend to characterize what is going on as a series of jitters about global growth," he said.
Not all emerging markets are being impacted equally, either. "There's a polar split here. It's negative for all of the commodity producers and exporters. Latin America, Brazil, Chile, Russia and Asia, Malaysia to some extent. In EM Asia, most of them are importers. China's an importer, so it's positive. It's not negative," he said.
The Fed Wednesday released minutes from its last meeting that the markets took as dovish. The minutes reflected that the Fed was still concerned about inflation, and that put market focus on the commodities sell off, particularly oil. The minutes also mentioned China, and that fed worries that China's slowdown is going to hurt other economies around the world as well as drive commodities prices even lower.
"A bit of volatility is no problem, but if we have a disorderly market, meaning markets are in free fall that's when the Fed will step in and say, 'Wait. In those types of disorderly conditions we're not going to move,' " said Lee. "I think the confusion is, are we in a free fall or are we just seeing volatility? We think it's volatility," said Lee.
The Fed noted that a material slowdown in Chinese would potentially create risk for the U.S. economy, but strategists say at this point there's no sign of it. Lee said there would be problems if China chills the economies of other Asian countries, which account for about 25 percent of U.S. trade.
"From the Fed 's view if the real risk is a hard landing, a significant growth slowdown. The Chinese taking action to loosen their currency peg, to help their exports actually takes a significant risk off the table. If the Chinese are taking action to mitigate risks that you're going to see a hard landing or significant slowdown," Hanson said.
The Fed did change its tune about financial stability risks, Lee said. In the minutes it said: "Participants also noted the challenges associated with identifying newly emerging risks as well as the implications for monetary policy of a hypothetical future situation in which financial imbalances were increasing."
Lee said the mention of potential future risks is a reason for the Fed to move, and it's a hawkish message.
Chadha says the Fed should move because the uncertainty has sent emerging markets lower.
"It's waiting so long. It's a cloud that has basically hung over emerging markets, and the cloud is basically still there. EM has suffered significantly," Chadha said.