Emerging market stocks experienced a significant decline, wiping out their gains for the year due to heightened trade tensions, reminiscent of the global financial crisis. This led investors to seek refuge in safer assets, causing MSCI’s main emerging equity index to plummet by 8.4% in a single day, the largest move since 2008. Concurrently, an index tracking emerging market currencies also decreased. Dollar bonds from emerging nations saw a selloff and the cost of hedging against debt default spiked to an 18-month peak.

Investors reacted with broad-based selling, elevating cash positions, although investment obligations limited available options. The recent tariff hikes imposed by President Trump stirred concerns of a significant slowdown in the US economy, potentially leading to a recession, as predicted by some economists, including those at Goldman Sachs. This trade conflict could have dire consequences on developing nations’ economies and trade activities.

China retaliated against the tariff increases by imposing duties on US imports, causing Chinese shares in Hong Kong to tumble by 13.8%, entering bear market territory. The People’s Bank of China devalued the yuan against the dollar, hinting at potential further devaluation. Stock markets across Asia, including India, Taiwan, and Malaysia, also experienced sharp declines.

While a decline in Treasury yields and a weaker US dollar could benefit emerging-market assets in the long run, stabilization in recession concerns is necessary. The MSCI index for emerging-market currencies registered a 0.5% decrease, with notable losses observed in the Mexican peso and South African rand, which reached a one-year low. The Egyptian pound also depreciated by over 2% against the dollar, marking its largest decline in a year.