As emerging markets sink into bear territory, one factor could be the tipping point 

Emerging markets have been ravaged by the bears.

Among the hardest hit, Turkey's TUR ETF has tanked 50 percent this year, China's FXI ETF has tumbled 12 percent and Indonesia's EIDO ETF has plummeted 21 percent. The EEM emerging markets ETF tipped into a bear market on Wednesday after falling more than 20 percent from its 52-week high set in January.

One trader says a key factor could trigger the next drop for emerging markets.

"It's oil that could be the tipping point that could send everything tumbling down," Boris Schlossberg said Wednesday on CNBC's "Trading Nation." It's "going to create a very, very onerous balance of payments problem for them going forward especially if oil goes high."

Emerging market economies pay for oil in U.S. dollars, meaning a high greenback against the local currency makes the commodity more expensive. The dollar recently hit a 13-month high against a basket of foreign currencies.

If crude oil can get back up to $70 and the dollar continues to strengthen against foreign currencies, the pressure will increase for emerging markets, said Schlossberg, managing director of FX strategy at BK Asset Management,.

"Those factors could really combine into a perfect storm for the market and have a very bad effect on us, because as emerging markets collapse that's going to definitely have a spillover effect into G-20 territory," he said.

An economic and debt crisis in Turkey has spooked emerging and developed markets in the past week. So far, G-20 economies such as the European Union, the U.S. and Japan have held up against the pressure, though global markets did see some heavier selling on Wednesday.

Rising fears of contagion are being reflected in the options market, though it might be worth the extra cost, according to Stacey Gilbert, market strategist at Susquehanna.

"The risk being priced into emerging markets on a relative basis to a small cap is off the charts," Gilbert told "Trading Nation" on Wednesday. "Protection in both the S&P 500 as well as the Russell 2000 is well worth the investment for the potential for contagion. … I'd want to own downside puts. I'm not as interested in spreads. I want the ability for me to be able to get short."

The EEM ETF is down 12 percent in 2018 and on track for its first negative year since 2015. Losses have escalated this month, dragging the ETF down to its lowest levels in more than a year.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

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 CNBCand 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.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect