I spent the Labor Day holiday in a deck chair along the shore of Newport, Rhode Island, re-reading a few of my favorite literary classics. That’s not everyone’s idea of a good time, but add a cooler of beer to the activity, and it works fine for me.

I came across this quote from Mark Twain: “History doesn’t repeat itself but it often rhymes.”

Twain’s aphorism occurred to me today, as I observed the growing apprehension on Wall Street of yet another emerging market collapse that echoes past crises but with singular differences.

The main U.S. stock indices fell today, as emerging market currencies sold off around the globe. Losses eased in the final minutes of trading, with stocks closing off session lows. The CBOE Volatility Index (VIX) spiked 4.51%. 

The iShares MSCI Emerging Markets ETF (EEM) fell 1.95% today, racking up its fifth straight day of declines.

We’ve seen this dynamic unfold before. Three times since 1982, emerging markets have tumbled like a house of cards. It could be happening again.

Related trade fears also loom over the market, as talks to revamp the North American Free Trade Agreement (NAFTA) stall and new tariffs against China are about to kick in.

Manufacturing surveys published yesterday showed growing pressure on factories throughout emerging markets as the global trade war escalates.

Igniting a fresh crisis…

The worsening trade war could be the match that ignites overseas contagion.

The public comment period on a U.S. proposal for new tariffs on Chinese goods is scheduled to end Thursday, after which President Trump will be free to follow through on his vow to impose levies on $200 billion more of Chinese imports.

It’s not just China. Trump today threw sand into the NAFTA gears, once again.

The value of U.S. annual trade with Canada is $662 billion, making Canada our largest trading partner. But the president today further worried investors by suggesting that the U.S would be better off without a trilateral NAFTA deal. In particular, Trump is pressuring Canada to open its agricultural sector, but Canadian farmers carry a lot of political clout.

The other two NAFTA members, the U.S. and Mexico, reached a bilateral agreement last week. Trade negotiations with Canada are set to continue Wednesday.

Fears about global trade were exacerbated by the worsening currency crises in emerging markets. Over the last four decades, we’ve witnessed three emerging market panics, all of which pummeled global stock markets.

Investors endured the Latin American debt crisis in 1982 and the Asian financial crisis in 1997–1998. Then came the “Fragile Five” crisis of 2013, a miasma of currency depreciations, ballooning national debts, and political instability that engulfed Brazil, India, Indonesia, Turkey and South Africa.

The headlines Tuesday conferred a distinct sense of  déjà vu, as emerging market currencies continued their year long slide. Notably, Argentina’s peso, Turkey’s lira and South Africa’s rand are in free fall. The U.S. Dollar Index (DXY) maintained its upward trajectory today, rising 0.34%.

Manufacturers are getting punished by the trade war, as higher input costs from tariffs compel them to curtail production and lower full-year guidance. The pain is especially acute in emerging markets that are export dependent. Many of these nations are major exporters of raw materials and they’re feeling the sting of falling commodity prices.

Developing nations grapple with onerous debt burdens, economic mismanagement, rising interest rates, a strengthening dollar, the global trade war, domestic political strife, and escalating tensions with the United States. That’s a daunting list of troubles.

Rising inflation stoked by tariffs could prompt the Federal Reserve to more aggressively hike interest rates, which would further strengthen the U.S. dollar.

In the bond markets, expectations that the Fed will hike U.S. interest rates again this month are pushing the yield on benchmark 10-year Treasury notes closer to the psychologically fraught level of 3%.

Rising rates and a stronger greenback place a disproportionate burden on developing markets. Over the past 10 years, many of these nations have taken on enormous dollar-denominated debt. In local currency terms, a rising dollar drives up the interest and capital repayments on those loans.

The following chart, compiled with data from the International Monetary Fund, shows emerging market national debt in relation to gross domestic product from 2012 to 2022 (*2017 to 2022 are projections):

Energy markets are getting pulled into the mess. U.S. benchmark West Texas Intermediate fell 0.89% today to close at $69.18 per barrel. Brent North Sea crude, on which international oils are priced, fell 0.72% to close at $77.59/bbl.

Rising demand, falling supplies and economic growth provide tailwinds for the energy patch. However, emerging market weakness weighs on oil prices, as we saw today.

Labor Day marks the unofficial end of summer. Brace yourself for what’s shaping up to be a volatile autumn.

Tuesday Market Wrap

• DJIA: 25,952.48 -12.34 (0.05%)
  
• S&P 500: 2,896.72 -4.80 (0.17%)
  
• Nasdaq: 8,091.25 -18.29 (0.23%)
  

Tuesday’s Big Gainers

• Canopy Growth (NYSE: CGC) +14.24%

Major analyst raises marijuana firm to a buy.

• R.S. Donnelley & Sons (NYSE: RRD) +9.98%

Analysts turn bullish on integrated communications company.

• Twilio (NYSE: TWLO) +7.88%

Cloud provider enjoys explosive demand.

Tuesday’s Big Decliners

• Aeglea BioTherapeutics (NSDQ: AGLE) -15.46%

Investors unimpressed with biotech’s clinical data.

• Applied Optoelectronics (NSDQ: AAOI) -11.22%

Fiber-optic firm falls on China growth fears.

• Zai Lab (NSDQ: ZLAB) -7.08%

Biotech announces proposed public offering of ADRs.

Letters to the Editor

“Do ADRs entail risk?” — Bill C.

Exchange rate risk is the biggest worry. ADR shares track the shares in the home country. If a country’s currency is devalued, it will trickle down to the ADR. This can result in losses, even if the company has been performing well.

Any topics you’d like me to cover? Let’s hear it: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.