[A boy plays on a disused sofa in the ruins of houses which were pulled down, in central Beijing, China, September 25, 2015. REUTERS/Jason Lee] Signs point to the beginning of a rout in emerging markets that could threaten the stability that the global economy has been enjoying since March. "The pillars that supported the EM rally earlier this year seem to be crumbling, as risk conditions have turned and have started to expose weak fundamentals and structural imbalances in EM once again," Morgan Stanley analysts wrote in a note released Tuesday titled "The Great Bear Rally Unwind." Now, remember February? That was when markets went nuts and analysts were calling for the end of days. New York City woke up each morning to bad news about the Chinese yuan sliding, sending markets in Shanghai and Hong Kong into a tailspin. The turmoil would spread across Asia, then to Europe — London and Frankfurt, Germany — and then finally to tired traders on Wall Street, surprised to live in a world in which the Chinese currency mattered so much. Thanks in part to record-low commodity prices and a strong dollar, no economies were hit harder during this period than emerging markets, which saw punishing outflows. Slowly, though, money started crawling back in as the dollar weakened. Also, the yuan and commodities prices stabilized, and the Chinese government engaged in stimulus at the end of the month. The problem now is that most of those trends are reversing. Here's Morgan Stanley again: The strong USD trend has resumed, and with Chinese data deteriorating and the Fed sounding more hawkish, two of the key pillars supporting the rally from February to April are now diminishing. Oil has been the odd one out, holding up relatively well, but if supply-side constraints fade, this would become a key risk factor. CYCLES GETTING SHORTER "The growth model for the advanced world is getting exhausted and for emerging markets it's getting contaminated," Mohamed El-Erian, the chief economic adviser at Allianz, said at the Milken Global Conference earlier this month. He was expressing his view that global economic stability would not last. In terms of emerging markets, their growth model can no longer depend on exploding Chinese demand — it can't even depend on Chinese stability. After engaging in stimulus to stave off the worst, the Chinese government has started to back off. Another group of analysts over at Morgan Stanley is looking at the country's property market, which saw a strong rebound thanks to government stimulus. [china property market] But then industrial output and lending slowed in April. The county's purchasing managers index also gave us a clue that this rally was not going to last. "A miss for the Caixin China purchasing managers' index in April suggests March's acceleration in activity has not been sustained," Bloomberg economist Tom Orlick wrote after the print. He said: The muted pass through from stimulus to the real economy reflects a combination of lackluster demand abroad, and high debt and overcapacity at home. Both make corporates reluctant to add workers or engage in capital spending. Stimulus will continue to provide tailwinds in the months ahead. With lending rising at a rapid clip, the People's Bank of China will be in wait-and-see mode before deciding on further rate cuts. Meanwhile, the yuan has fallen to a three-month low on fears that the US Federal Reserve will hike interest rates on June 15. HOLD FAST We're not saying things will get that bad, but we are saying things are about to get a little crazy in emerging markets, and now we know that could have reverberations all over the world. [emerging markets impact stocks morgan stanley chart] We do have two factors keeping markets stable for now, though. For one, the price of oil seems to be holding steady at a price that is painful for producers — including Nigeria, whose economy is headed toward a crisis — but at least isn't making the market puke. The other thing the world has going for it is the stability of the Chinese yuan, which we now have reason to believe will be backstopped by the government. Here's how we know: Back in November, China was admitted into a special club of global reserve currencies, the Special Drawing Rights basket. To get into the club, China had to allow its currency to move with market forces. But according to a report from The Wall Street Journal, that hasn't been the case. Leaked minutes from meetings with Chinese economic authorities show that President Xi Jinping is more interested in keeping the economy stable than in modernizing and reforming it so that it is moved by global markets and not the Chinese state. So perhaps the government will see fit to continue to fix the yuan. But then maybe not. AND A WILD CARD We should also note that one more danger has entered this fray: Brazil, the world's seventh-largest economy. Until now stocks have been stable, despite the country's recession. Markets liked the impeachment of President Dilma Rousseff, and Brazil's stock index, the Bovespa, has returned 14% to investors in 2016. But now Rousseff's successor is under fire. Michel Temer, her former vice president who has taken over during the impeachment, has already had to fire a key member of his administration because of leaked tapes indicating that Rousseff's impeachment was politically motivated. Thousands of Brazilians hit the streets in protest over the weekend over both that and budget cuts Temer proposed to help fix Brazil's ailing economy. Belt tightening is what markets want, but it may not be what the Brazilian people want. In fact, Temer may not be what they want, and that would add chaos to an already crazy picture. So prepare for an interesting summer. Join the conversation about this story » NOW WATCH: FORMER GREEK FINANCE MINISTER: How I dealt with stress when Greece nearly defaulted
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