Black Monday – Back to the Future

Last Monday 24 August, 2015 has been labelled Black Monday with billions of dollars wiped off global indices. Similar to the Black Monday of 1987 that sent stock markets around the world crashing and losing huge amounts in just minutes which began in Hong Kong, this Monday’s crash began in China.

Tsunami like, the unprecedented collapse in Chinese shares engulfed the financial markets on Monday. Faced with violent market swings, many dealers didn’t know which way to turn sending the volatility index VIX (otherwise known as the ‘fear index’) shooting to a 4 year high.

Here’s some of what happened:
• Shanghai composite dropped 8.5% – it’s worst one-day drop since 2007 (40% since June after a 140% rise last year)
• The Nikkei 225 index slumped 4.6%, a six month low and its largest drop since 2013
• The Hang Seng fell 5.2%, it’s largest-off in 30 years.
• The MSCI index of Asia-Pacific shares plumbed to a three year low by losing 5%
• Blood was also on the floor in Wall Street with The Dow Jones Industrial Average losing 1000 points just minutes after market opening, the US S&P 500 fell a sharp 6% – all leading to futures trading in both markets being suspended temporarily
• Europe saw the worst loses since the 2008 crisis with the UK Footsie down 4.5%, France’s CAC shaving 5.6%, the German DAX losing 5% and EU Stoxx 600 index falling 5.% – resulting in billions of lost dollars for European companies
• Middle Eastern markets weren’t spared the carnage with Saudi, Dubai, Egyptian and Israeli markets all taking a tumble
• Currencies were also tarnished with the USD/JPY dropping 130 pips in less than a minute
• Emerging markets joined in the panic with the Russian Rouble falling to an all-time low of 70.74 to the USD.

Are we due for another major crash like the 1987, 1997 and 2008 crises? And if we’ve seen this kind of action every decade for the last 3 – what’s causing it this one?

As the second largest economy in the world, China is the anchor economy of the east. However, with a $27 trillion debt, the markets are losing faith in the Communist government’s ability to handle the situation. And with a vulnerable west just beginning to recover from the 2008 crisis, the impact has been severe indeed. After all, the performance of markets has a lot to do with investor confidence, and when that confidence is shaken then it’s not surprising to see such volatile action.

So what’s China done to warrant this lack of faith? The last couple of weeks has seen a major slowing of commodities, much of this pegged to a slowing Chinese economy. Last Friday, the Caixin PMI dropped 47.1 in August, not only below analysts’ expectations but also lower than the key 50 signaling a contraction of the economy. The manufacturing data is at its lowest for the last 6 years (when the global crisis was at its peak), and China’s Q2 GDP release showed only a 7% growth. While ‘growth’ may sound like a good word here, in actual fact it is at its lowest for 25 years!

Last week’s move by the People’s Bank of China to devalue the Yuan (three days in a row) reinforced investors’ fears of an economic slowdown. Other moves by the desperate leaders included allowing pension funds to buy shares for the first time – but the move back-fired with the funds anything but eager to buy in a deteriorating market. With the markets in free-fall, some traders were expecting the government to step in to buy shares on Friday, others were waiting for added liquidity by cutting banks’ reserve ratios and when they failed to act, panic entered the markets.

Is this all building up to a perfect storm? Recent rallies in the EU markets and with breaking news of China cutting interest rates may just head of another global disaster. Or it may not.

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