Emerging markets, sinking into a correction this year, may fall further still

Emerging market stocks have sunk into correction territory, and they may feel further pain as the fundamental backdrop for owning them has gotten sapped.

The large emerging markets-tracking ETF, the EEM, has fallen over 11 percent since its Jan. 26 high; that's also when U.S. equity markets peaked this year.

Its move was more or less sideways, and then down, as the ETF's losses have amounted to 7 percent in the last three months alone. We see three reasons for this.

Slowing global trade

Global trade is showing signs of slowing, and that has been the resounding support for this trade. The World Trade Organization last month published estimates suggesting a slowdown in the second quarter, even before tariff considerations.

King dollar

The U.S. dollar has strengthened considerably, turning in a headwind for emerging market economies selling goods abroad. Sales growth has been slowing from a peak of 13.26 percent in the third quarter of 2017 and is expected to continue slowing into year-end.

Geopolitical unrest

Geopolitical tensions and policy concerns, particularly around tariffs, have sent shockwaves of volatility back into the markets, another headwind for emerging markets. Their forward multiples, meanwhile, have fallen on market uncertainty, led by China.

Ultimately, while the U.S. may yet weaken from here and the volatility may settle, the broader fundamental story tells us the biggest reason to own emerging markets is now behind us.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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