At the end of last year, investor sentiment towards emerging markets was bleak. Now, the whiff of panic is in the air.
Last week's aggressive rise in Turkey's interest rates to shore up the country's wilting lira currency, has not only failed to restore confidence but also sparked a new leg in the sell-off in emerging markets, which has become more indiscriminate over the past few weeks and is now weighing heavily on global equities.
Is this the start of a full-blown emerging market meltdown reminiscent of earlier crises in the 1990s?
The damage is already considerable. Global stock markets suffered their worst January since 2010, with the S&P 500 Index down 3.6 per cent - its first monthly loss since August. On Monday, it fell a further 2.3 per cent. The next day, Japan's stock market dived 4.2 per cent.
Investors are taking refuge in safe-haven government bonds, with the yield on benchmark German debt down nearly 30 basis points this year and its US Treasury equivalent off 41 basis points at 2.59 per cent.
For the first time since the sell-off in emerging markets began in May last year, the currencies, stocks and, to a lesser extent, bonds of developing economies are falling despite a sharp decline in the yield of US treasuries.
This suggests that other factors are shaping sentiment towards emerging markets in addition to the withdrawal of monetary stimulus by the US Federal Reserve.
On the external front, the slowdown in China's economy is arguably of greater significance to emerging markets than the scaling back, or tapering, of the Fed's asset purchases. The latest batch of weak manufacturing and service sector data underscores the challenges faced by China's leadership in taming the country's credit boom without significantly endangering growth.
However, the latest phase of the emerging market sell-off has as much - if not more - to do with country-specific vulnerabilities that have become a source of financial contagion to economies which until now had proven fairly resilient to the sell-off.
Last week, the Hungarian forint and the Polish zloty - two emerging market currencies which actually strengthened against the US dollar in the May-August phase of the sell-off - fell sharply, as did both countries' local currency bonds.
The sharp decline in the forint - the worst-performing emerging market currency last week after falling nearly 4 per cent - is alarming given that Hungary boasts a current account surplus. This is in stark contrast to the balance of payments deficits in Turkey, South Africa and Indonesia, which have rightly become focal points for market anxiety.
Russia, which also enjoys a current account surplus, albeit a rapidly dwindling one, is facing bigger problems, with the rouble's 7 per cent slide this year forcing the central bank to intervene heavily in the foreign exchange markets at a time when it is supposed to be preparing the currency to float freely next year. This is an invitation for further speculation against the rouble.
Markets are now starting to price in interest rate increases in Hungary and, to a lesser extent, Russia over the next year or so. Yet this is the last thing that weak economies such as Russia's, which grew 1.3 per cent last year and whose manufacturing sector continues to suffer shrinking output, need right now.
Indeed, the aggressive nature of Turkey's rate rises, against a grim backdrop of a slowing economy and an international investment community that is putting pressure on its central bank to maintain a tight monetary policy, is throwing the policy dilemmas confronting emerging markets into sharper relief - in particular the trade-off between preserving financial stability and fostering growth.
The credibility of the policymaking regime in emerging markets is coming under close scrutiny.
While investors remain concerned about the fallout in developing economies stemming from the shift in US monetary policy and China's attempts to engineer a soft landing, they are equally troubled by the politics of macroeconomic adjustment and structural reform in emerging markets.
Does Turkey's central bank have the stomach - and the institutional independence - to persevere with a stern anti-inflationary policy at the expense of growth? Will India's next government press ahead with much-needed structural reforms? Perhaps most worryingly, will there be a sovereign debt default in the riskiest emerging markets such as Ukraine?
The most reassuring feature of the current sell-off is that institutional - as opposed to retail - bond investors are staying put. Any sign that "real money" investors are retreating significantly would almost certainly lead to a full-blown market crisis.
This is clearly not the case for the time being, despite the pervasive bearishness about the emerging market asset class.
Nicholas Spiro is the managing director of Spiro Sovereign Strategy