The last week of August was one of the most volatile we have seen in global equity markets for several years. The fear that had been building hit the markets with a jolt on Monday 24 August. The warning lights had been flashing for several months but developed equity markets, with the complacency of a boiling frog, had appeared unconcerned by the worrying developments in other asset classes.
Clearly, there were fundamental triggers for the market declines but, in our view, the market moves were exacerbated by flow considerations and market technicals. So, what happened?
What caused the US market to lurch lower so violently and then recover? How could a stock like GE, for example, a $250bn company, fall as much as -21% in the first few minutes of trading and then recover to close the day down less than -3%? Apple, the world’s biggest stock, ‘lost’ $79bn worth of value at the market open but had recovered it all within an hour (by the way, that is broadly equivalent to the entire market cap of AstraZeneca).
First, let’s recap on the fundamental triggers.
Commodity prices had been weak for some time, initially on supply developments but more recent moves lower have been demand driven, signalling a deteriorating global growth outlook, especially in China. Fears about the world’s second largest economy in recent months had spilled over into emerging market currencies, their equities and in to the high yield debt market.
At the same time, the Chinese stock market had become completely detached from the reality of its underlying economy. The fall from its peak in June has been spectacular – in less than 10 weeks, the value of mainland China equities broadly halved, wiping out more than the total capitalisation of the UK stock market in the process.