Five charts that suggest Black Monday isn't the start of the next financial crisis

What happened next after Black Monday wiped $3 trillion off global equity markets

Hazel Sheffield
Wednesday 26 August 2015 08:19 BST
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By mid-morning in China, Tuesday looked like it could bring with it another bloodbath.
By mid-morning in China, Tuesday looked like it could bring with it another bloodbath.

European and US stock markets showed gains on Tuesday after the panic of Black Monday, which by some estimates wiped $3 trillion off global equity markets in the worst day of trading since the global financial crisis.

By mid-morning in China, Tuesday looked like it could bring with it another bloodbath. The Shanghai Composite Index slipped a further 7 per cent.

Once the Chinese market closed, Beijing finally stepped in to cut interest rates. The measures were expected to keep China on track for 7 per cent economic growth this year, but the timing suggested the state bank taking a firm hand to stop a further slide in stock markets.

By the time Beijing played its hand, other Asian markets had rebounded from Monday’s losses.

In Europe, the FTSE100 made gains of around 3 per cent on opening. “After the market-wide panic of ‘Black Monday’ cooler heads seem to be prevailing this Tuesday morning as investors begin to pick up the pieces, even if China itself continues to struggle,” said Connor Campbell, financial analyst at Spreadex.

Elsewhere in Europe the Germany’s DAX index and France’s CAC 40 also saw gains. While the pull-back was shocking on Monday, the quick recovery came to the relief of many investors.

“Whilst we should expect some heightened volatility over the next few months, importantly this doesn’t yet feel like the start of a more significant sell-off of the type seen with the bursting of the tech bubble in 2000, or the sub-prime crisis of 2007,” said Simon Marsh, partner at Killik & Co stockbroking service.

One measure of volatility, the VIX, recorded its largest two day rise in history on Monday and closed at highs not seen since 2009, but receded sharply, suggesting that the panic was short lived.

Analysts at Bank of America Merrill Lynch said that the stress in markets as a whole – not just stocks – remained lower than 2011 or 2012 peaks. “This illustrates how concentrated this shock has been to a few markets,” analysts said.

When the opening bell rang in New York on Tuesday, significant gains seemed assured. The Dow Jones performed, rising 1.2 per cent in the first few seconds, and the benchmark S&P 500 followed suit.

As Monday’s bloodbath began to look like more of a blip, investors began to look for reasons behind the chaos, with some seeking greater transparency from China to prevent a repeat of events.

“There was no clear catalyst for the global stock meltdown. The lack of clarity makes it difficult to assess what is needed to stem the rout. A coordinated policy response is critical, and much of this needs to come from Asian economies,” said Bernard Aw, market commentator at IG Markets.

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