The knee-jerk reaction is to blame the recent turbulence in emerging markets on the shifting monetary policies of the world’s most powerful central bank: the Federal Reserve.

That’s because the Fed’s moves will inevitably lead to higher U.S. interest rates, which will inherently hurt emerging market currencies that have benefited from a flood of cash searching for higher returns.

But what if there is more to this story? After all, U.S. bond yields have actually dipped since the beginning of this year, a trend that should ease pressure off emerging market bonds.

“I don’t think the Fed is to blame,” said Josh Feinman, global chief economist at Deutsche Bank’s (DB) Deutsche Asset and Wealth Management. “People have been onboard with tapering for a while now. I don’t think we’ve had anything new out of the Fed in the last week or two.”

Strategists at Brown Brothers Harriman point to a number of non-Fed factors behind the emerging-market turmoil, including renewed fears about China’s pace of growth and banking sector and country-specific issues that are weighing on individual economies.

“If something bad happens, the U.S. is always a likely suspect,” said Marc Chandler, global head of currency strategy at BBH. “The Fed could have some background noise effect but the proximate cause is probably not the Fed.”

QE Ripple Effects

After five years of historic intervention, the Fed has begun tapping the brakes on monetary stimulus. By cutting back on QE and eventually even raising interest rates, the Fed will be allowing the yield on U.S. Treasurys to rise.

Since Treasurys remain the benchmark for other forms of credit, including bonds of emerging-market countries, the ensuing rise in bond yields will trickle down to countries like Argentina. This threatens to reverse the flow of capital into emerging markets, many of which are reliant on foreign capital inflows.

“It’s not just tapering. It’s the fact the Fed pumped so much liquidity out through all three rounds of quantitative easing. Holders of dollars sought to diversify,” said John Ryding, chief economist at RDQ Economics. “We’re starting to see repatriation.”

However, BBH notes that U.S. Treasury rates have actually dipped in recent weeks, which suggests Fed policy may not be the sole culprit here. The 10-year Treasury yield is down 0.264 percentage points since the start of the year and is still safely below the 3% threshold. 

(Click here to read a preview on the FOMC's policy decision this week)

China Rattles Investors

While Fed policy has remained the same, perceptions about China, the mother of all emerging markets, have been altered by recent events.

Last week, just before emerging market currencies began to plunge, HSBC’s (HBC) flash estimate of manufacturing activity for January slid below the expansion/contraction line for the first time in six months.

Also, last week investors began to grow more nervous about a $469 million bank-sponsored coal mining fund in China that is expected to default. The looming default highlighted long-standing concerns about China’s $5 trillion shadow-banking system.

However, on Monday the Industrial and Commercial Bank of China told investors in this wealth-management product that they can recover their principal. It’s not clear where the source of the bailout is coming from, but has eased anxiety, at least in the short term.

Global investors have also been digesting comments by Bank of England Governor Mark Carney, who last week signaled an end to the forward guidance strategy he helped invent.

That raised questions about the Fed’s use of forward guidance, a policy that seeks to give a path of future monetary policy by linking it to economic indicators like the unemployment rate.

‘Homegrown’ Problems

Focusing exclusively on the Fed absolves the leaders of emerging markets that have problems of their own. 

“A lot of their problems are homegrown,” said Feinman.

For example, Argentina is facing dwindling foreign-exchange reserves, inflation that is believed to be above 25% and dramatically slower growth. Argentina, whose currency has plunged about 19% this year, experienced an economic depression and financial crisis in the late 1990s and early 2000s that roiled global markets.

“Throughout history they have lurched from one crisis to the next,” Feinman said.

Venezuela is reeling from the implementation of strong-arm economic policies and tame oil prices that have led ratings companies to warn of a potential economic and financial collapse. It’s hard to blame the Fed for those issues.

Political unrest is also rattling the currencies of Thailand, Turkey and the Ukraine, where on Tuesday the government looked to quell tensions by accepting the resignation of the prime minister.

Ryding notes that the country-by-country issues did not suddenly materialize.

"They have been masked by the fact that QE and the dollar outflow made emerging markets a place where money flowed to. Individual problems could have been papered over," said Ryding.

While observers continue to debate the roots of the emerging market turbulence, global investors are breathing a sigh of relief that the situation has calmed in recent days as central bankers and political leaders race to stave off an all-out crisis.

“The weekend was like a circuit breaker,” said Chandler. “There’s a greater sense of calm and a return of normalcy.”

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