Emerging markets are getting walloped by a surge in crude-oil prices, amplifying a downturn already under way amid a U.S. dollar that has mostly rallied in the first half of 2018.

On Thursday, one measure of emerging market equities, the iShares MSCI Emerging Market,












EEM, +0.27%










was on track to fall by 3.6% this week and 7.3% this month, according to FactSet. That means the fund is poised to see its worst weekly decline since March 23, when it dropped 4.7% and its worst monthly drop since an 8.6% tumble in August of 2015, when worries about China’s economy helped to spark a global rout and underscored concerns about the health of emerging markets.

Although individual emerging markets can rise or fall due to their own specific issues, in general terms, rising crude oil price have been a main headwind for countries that tend to import the bulk of their oil. That’s made countries like Turkey and Argentina vulnerable to the rally in crude.

Brent crude












LCOQ8, -0.19%










the international benchmark, is up 2.5% this week, and has surged by more than 16% so far this year, to trade $77.45 a barrel, while the U.S. benchmark, West Texas Intermediate crude on the New York Mercantile Exchange












CLQ8, +0.85%










has catapulted 7.3% higher so far this week to $73.50 a barrel, on pace for its best weekly rise since 2016. It’s on track for a blistering 22% year-to-date advance that also would mark the best yearly gain since 2016. Both benchmarks are at their highest levels since 2014.

The effect of this rally is, perhaps, best illustrated by looking at how the emerging market fund (in green) has performed during the jump in oil prices (in blue) so far this year:

Source: FactSet


The rising buck, which can make dollar-denominated debts more difficult to service for emerging-market borrowers, also has created a headwind. The chart below shows the buck’s advance, as measured by the ICE U.S. Dollar Index












DXY, -0.09%










(in pink), against the iShares EM fund:

Check out: Emerging markets feel the pain as dollar, Treasury yields rise



Read: Opinion: The carnage in emerging markets stocks is just beginning

The one-two punch of rising energy costs and a buoyant buck has weighed mightily (among other political factors), on the currencies of Turkey and Argentine. Turkey’s lira












USDTRY, -0.7139%










has lost about 1.7% against the dollar this month and is on track to decline by 17.6% year to date, while Argentina’s peso












USDARS, +1.6291%










has shed 10% so far this month and is approaching giving up a third of its value against greenback for the year.

The dynamic around currencies and crude highlights the view that a synchronized global growth scenario that played out in the latter half of 2017 has been turned on its ear as the Federal Reserve completed its seventh rate increase earlier this month.

Calamos Investments argues that a combination of the actions by the U.S. central bank and fiscal policy undertaken by the Trump administration, notably corporate tax cuts, have helped to deepen the rift between emerging market economies and Europe on one hand, and the U.S. on the other.

“The U.S. dollar is a symbol of the revival of ‘domestic America’ and the credibility of monetary normalization,” according to Michael Grant head of global long/short at the Calamos Phineus Long/Short Fund.

Grant said “every extended period of U.S. dollar strength since the 1970s has been associated with the leadership of U.S. equities, measured in common currency.”

The difference between the U.S. and the rest of the world is illustrated by the contrasting year-to-date performance between the iShares MSCI EAFE ETF












EFA, +0.17%










which excludes the U.S., and the S&P 500 index












SPX, +0.18%










EFA is down 5.4% so far this year, while the S&P 500 has risen by 1.3% (see chart below with EFA in gold and the S&P 500 in blue):



Meanwhile, the Dow Jones Industrial Average












DJIA, +0.08%










 is lower for the 2018 but is only down 2.2%, while the Nasdaq Composite Index












COMP, +0.24%










is up 8.3% in the first six months of the year, despite recent pullbacks that have been mostly driven by intensifying concerns about the U.S.’s protectionist policies over trade.

Read: Opinion: 3 reasons why the U.S. will keep escalating its trade wars



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