5 Reasons Why the Global Market is Melting Down

The market meltdown has caught many by surprise.  Stocks have tumbled and volatility has soared, sending commodity prices lower.  Here are 5 reasons why the global market is melting down.

1) The contraction in sentiment has generated dark clouds over Shanghai which has propelled China’s largest stock market into bear market territory. In just the last 6-trading session the large Asian stock market has tumbled more than 19%, generating whipsaw price action and surging volatility.  Stocks in Europe and North America has followed suite with the S&P 500 index dropping 15% from its recent peak in July.  The U.S. dollar has been under pressure as rates in the U.S. decline and traders remove any inkling of tightening in interest rate instruments.

2) Attention has now been turned to the Federal Reserve which has a decision to make prior to its monetary policy meeting in September.  It appears that yields on the U.S. 10-year are currently removing any chance of a Fed tightening in 2015.  Short end interest rate futures are now giving the Fed only a 10% change of tightening rates in September.  It will be an upward battle if the Fed decides that it is an island to itself.  China will not turn around in the near term, and it will likely take a big dose of QE to get the world’s second largest economy rolling.

3) We may have thought the Greek crisis was behind us and “Grexit” talk off the table, but Tsipras’ gamble on early new elections in the hope to widen his power base, could still throw a spanner in the works. If anti-austerity forces win the day and once again question the agreements and commitments that form basis of the bailout, a final break with the rest of the Eurozone may become inevitable. At the same time, the economic slowdown in China has started to overshadow growth as the main threat to the Eurozone outlook. Especially Germany is likely to feel the heat from the slowdown in emerging market economies and if the situation continues to deteriorate, pressure on Draghi to do even more to support the recovery will rise again.

4) The second reading of German Q2 GDP is expected to be confirm the quarterly growth rate at 0.4% and the annual rate at 1.4%, leaving the focus on the breakdown, which is likely to show positive contributions from consumption and net exports. Spanish Q2 GDP growth meanwhile is expected to be confirmed at a strong 1.0% q/q, but the main focus is on the last round of August confidence indicators. Germany is the last straw in Europe and investors are thinking this could be once that breaks the camels back.

5) Sentiment could tumble. The IFO Business Climate is a close call with strong orders and manufacturing PMI numbers battling against the worsening outlook for China. This release is a test of sentiment and will reflect how manufacturers are viewing the recent economic worries in Asia. There could be an unchanged reading to 108.0, but a correction would not be a surprise, as it seems only a matter of time before confidence indicators fall on a broad front, if the global outlook continues to deteriorate. French business confidence is likely to drop in the light of the disappointing PMI readings and there is likely to be a decline in the manufacturing reading to 101 from 102 with a risk to the downside.