26 August, AtoZForex.com, Vilnius – Following the sharp market sell-off during, what is now called, the Black Monday many traders have posed the question: “what could have sparked such selling spree?” The following are a breakdown of important influencing factors and causes behind Black Monday.
One of the reasons is due to Chinese slowing economic growth. The benchmark Shanghai Composite index continued to tumbling down, on Monday as it closed 8.5% lower, at a five-month bottom of 3,210.8.
Moreover, the contraction is not only happing in China. Major economies such as the US and the UK have also signaled tepid growth figures and some of the major EM economies, like Brazil, report economic shrinkage in 2015 and even in 2016.
After a massive China’s Yuan devaluation, a few weeks ago, the country might be viewed as the winner in of Trade Wars, where countries devalue their currencies in order to boost exports.
However, China has been rather just a follower, other countries such as Japan, Brazil and Russia began the process beforehand.
The re-initiation of debt-backed assets have occurred after the biggest asset-buying of the Quantitative Easing programs ever enacted by the central banks around the globe.
When concerns arose about the programs, the central banks have initially maintained the round of debt sparked market optimism, pointing that this time is different from prior market cycles. Whether the remarks are accurate, only time will tell.
Another factor which could be considered is the financial market seasons. August is purely low volatile time of the year, compared to for example May, due to many market participants being away on vacation.
However, trading volume during the prior week was lofty, some indices even had the biggest volume-day during the whole year. Thus, the current selloff might have been a bring-back of the markets to a more realistic valuation. Come to think, once everyone is back from the vacation, September could be even worse…