Global markets slink out of their gloomiest week in seven years
Reeling world markets took another blow yesterday when Chinese shares sank 4pc, as concern about rising borrowing costs and soaring volatility put shares on course for their worst week since the height of the Eurozone crisis.
Losses on European stock exchanges accelerated and volatility rose yesterday after initially opening only modestly lower.
Analysts and investors have scrambled to understand the causes of one of the sharpest stock market falls in history, which occurred almost out of the blue.
Key factors are now seen to be interest rates, which remain low but have surged recently, outpacing market expectations.
Technical factors, including an incorrect but massive bet across the market that share volatility would stay low, also had a major impact.
A scramble to exit those failed volatility bets in turn contributed significantly to the sell-off.
Yesterday, China's drop ripped up market confidence again after a second 1,000-point loss this week on the US Dow Jones Industrial index, putting it officially into correction territory.
Capital flow figures that track whether money is being put into shares or taken out of the market showed a record $30bn (€24bn) had already been yanked out of stocks during the rout.
However, even after that, Bank of America's closely-followed "Bull & Bear" indicator was still flashing red and warning investors to sell.
Data from the markets suggests just $4bn flowed from equities into bonds - traditionally seen as a safe haven when shares are hit.
Money flowed out of the gold market too, and in many cases investors opted to hold cash, a real sign of a market not knowing what to do with its money.
"After the moves earlier this week market investor sentiment is fragile, and because of this we aren't expecting the markets to immediately start moving higher once again," said JP Morgan Asset Management Global Market Strategist Kerry Craig.
"But given that US markets are now in correction territory - with a 10pc drop since the market peak in January - it's likely that the most severe gyrations will hopefully have passed," he added.
US futures were up 0.7pc early in the European trading day, but fell back by lunchtime.
Dow Jones futures were last down 0.1pc, while S&P 500 futures edged up 0.1pc. That simply means the market consensus is for shares to fall.
The main gauge of European stock volatility extended hit its highest level since June 2016, when the Brexit vote sent markets spiralling.
But implied volatility on the S&P 500 was calmer, falling back slightly ahead of the US open.
Ironically, the storm of volatilty on world markets over the past seven days was sparked by good wage growth data from the US. It in turn prompted speculation that the Federal Reserve will speed up interest rate normalisation as a result.
Yesterday the market actually shrugged off bad news.
There was limited reaction as the US government staggered into another Federal shutdown after politicians there failed to meet a funding deal deadline, but it did play into many of the overarching market concerns this month.
The yield on benchmark 10-year US Treasuries, a driver of global borrowing costs, was hovering at 2.84pc, just short of Monday's four-year high of 2.885pc.
Europe's mainstay - German Bunds - were barely budging too at 0.74pc, as their recent rise in yields left them flirting with another weekly rise, which would mark their longest run of weekly gains in 16 years.
Higher yields are seen hurting equities as they increase loan costs for companies and ultimately for consumers.
They also present a relatively low risk alternative to investors who may reallocate some funds to bonds from equities as yields pick up.
For MSCI's broadest index of world shares, the 47-country ACWI the slump was 6.2pc, which puts it on track for its biggest loss since September 2011.