I can’t look, but how did the day pan out in numbers?

Brutal. Simply brutal. The trouble started in Shanghai, where the Chinese stock market closed 8.5% lower, its worst one-day decline in percentage terms since 2007, according to CNBC. Other Asian markets followed: Japan’s Nikkei -4.61%, Hong Kong’s Hang Seng -5.17%, Australia’s ASX -4.09%…you get the picture.

Once the jury in the East had handed down judgment, you weren’t expecting the Europeans to put up a fight did you? The UK’s FTSE 100 retreated by 4.5%, the German DAX -3.7%, and the French CAC40 -4.6%.

On home soil, the All Share Index was down 5% at one stage, but fought back to close just 2.85% lower. There were some big hits in individual company share prices though, and the local market is now firmly entrenched in an official correction.

Unsurprisingly, the Americans smelled a rat. In fact, it got so bad before the market even opened there that the Dow Jones futures fell by more than 700 points. US markets have arcane rules for times like these, and Rule 48, which was invoked yesterday, has only been invoked four times in the last seven years. (You can read more about it here).

This didn’t stop the Dow and S&P 500 closing 3.57% and 3.94% respectively.

So why did the rand blow?

The rand has been trading weaker over the last few months on the back of weaker commodity prices, which still accounts for a large portion of South Africa’s export earnings. Naturally as the dollar price of commodities like gold, platinum, iron ore and manganese fell, so did our ability to earn earn foreign exchange, and that means less dollars buying rands.

But today was all about the “risk-off” trade. When investors see panic and fear on the scale they did yesterday, the money goes home. So the money gets pulled out of emerging market currencies, and gets converted back to pounds, dollars and euros. Adieus!

So what sparked the carnage in China?

Shanghai Composite Index – 1 year to 24 August 2015


Source: Bloomberg

This has been building for a while. As you can see, the Chinese stock market – as represented by the Shanghai Composite Index – had a helluva run from this time last year to about June (when it peaked). In total, it was up about 134%, before suffering a sell-off in July.

As we learnt from Liang Du, fund manager of the Prescient China Balanced Fund, due to the incredible run-up in the Chinese market, retail investors had begun to borrow against their retirement savings to get a piece of the rapidly advancing market. While the correction affected relatively few, Chinese regulators had to step in and introduce a range of measures to calm the market (more of which you can read about here). This served as the first tremor.

But anxiety had been building in the background. There has been a lot of skepticism regarding China’s official economic data, in particular the 7% GDP growth number. We’ve all heard about the ghost cities and towns that exist across the Chinese countryside. And we’ve seen commodity prices fall, a sign of a very unhappy situation for the largest consumer of commodities at the margin. By a range of different measures, the numbers weren’t adding up.

But those are all issues we already knew about, right? 

Correct. But what scared the pants off of everyone was China’s devaluation of the Yuan two weeks back. This was construed as an unofficial ‘official’ acknowledgement by the Chinese government that things were not looking good. The devaluation was seen as a move to bolster exports and support the economy.

While you can’t tell exactly when all the animal spirits will wake up one morning and decide to sell, you can get a sense of the anxiety building in the market. When the Chinese regulators failed to support the market after the sell-off last week, investors decided, on Monday August 24, that enough was enough.

…And Kablewey!

Yup. No-one knows where it goes from here, but expect massive Chinese intervention to try and stem the tide and put a lid on things. But once the genie is out the bottle, all bets are off.

Article credit: http://www.moneyweb.co.za/news/markets/so-what-on-earth-happened-yesterday/