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The Causes and Consequences of Black Monday

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The Causes and Consequences of Black Monday

By - Monday 07 September 2015

It started with a heavy drop in American markets on Friday 21st August causing shockwaves around the world as the Dow plummeted 531 points, concluding its worst week since 2011.


Three factors influenced the significant drop in US markets on that day:

  • Growing concerns that China’s economy was contracting at a faster rate than its government had stated.
  • Investors’ thwarted preparations for the US Federal Reserve to raise its benchmark rate in September, with the central bank sending mixed signals resulting in the market’s worst enemy – uncertainty.
  • Oil prices dropped below the key $40 level for the first time since 2009.

European stock markets also faced severe selling, with major markets crashing in excess of 2.5%, following US stocks lower as worse-than-expected Chinese economic data and a sharp drop in oil prices spooked traders. The pan-European FTSEurofirst 300 closed down 3%, suffering its worst one day fall since October of last year. London’s main index, the FTSE100 finished 2.8% lower, closing out its biggest weekly loss in 2015; Germany’s DAX finished just shy of 3% down and the French CAC plunged 3.2%.


In Greece, Prime Minister Alexis Tsipras had resigned on Thursday, calling snap elections in September. After fighting the last election on an anti-austerity platform, and spending most of his time in office attempting to reverse some of the changes made in Greece under its international bailout, he was eventually forced to back down in negotiations with the country's creditors in July.

The Greek stock market reacted negatively, shedding 2.5% of its value.


The Straw that Broke the Camel’s Back


With so much volatility towards the end of the week in all the world’s major financial markets resulting largely from uncertainty about the future of China’s economy, there was still an air of confidence that declines were just a simple glitch. But when Asian markets closed down a massive 8.5% on Monday 24th August – the Shanghai Composite’s worst single day decline in 8 years - The People’s Daily, the Communist party’s mouthpiece, declared the day “Black Monday” and the crash gathered momentum.


By midday on Monday the FTSE100 had fallen almost 4.5% to 5,914 points wiping more than £60bn off the index of leading UK shares. It was the first time the index had dropped below the 6,000 mark since early 2013, with almost all companies in the red following the previous week of declines. Germany’s Dax index fell more than 5%, dropping into bear market territory after losing 20% of its value since April. The French CAC index was also down almost 5%.


Reliance on China Devastates World’s Financial Markets


Black Monday saw hundreds of billions wiped off world’s financial markets as shares tumbled in Europe, Asia and the US. The biggest fallers were mining companies that rely on demand from Chinese manufacturers for their coal, iron ore and other metals. Glencore, the giant commodities trader and miner fell 8% and BHP Billiton lost more than 7% of its value.


After rising as much as 60% to the start of 2015, the Shanghai Index is now significantly lower. This has had a compounding effect on commodity prices, with oil prices falling to $37/barrel. Companies in the auto and luxury sector also saw the fallout with France's Peugeot Citroen and Germany's Daimler, both sharply lower.


Black Monday - The Situation One Week Later


After a week of frenzied trading, Asian markets opened on Monday with much more of a sense of calm. Europe and US markets opened in sequence and continued the slower trading pace, spurred by the absence of British traders on the UK’s Bank Holiday Monday. Losses made had been partially recovered in the immediate aftermath of Black Monday last week and most commodities, currencies and stocks found new resistance levels slightly below those set by trading activity prior to last week’s crash.


Essentially after the shock of Black Monday, the dust appears to have settled in financial markets. However there is still a strong sense of uncertainty throughout and trading is comparatively thin, highlighting increased risk aversion. Gold has risen again as the world’s safe-haven during times of extreme volatility although investors are certainly less bullish than after the 2008 financial crisis.


The Best Safe-Haven of All


Real estate remains the best way to protect your capital during volatile markets, riddled with uncertainty. Property has the advantage over gold of retaining its value more consistently. Gold has traditionally always correlated with the dollar and rises and falls can be significant and unexpected.


Real estate also provides investors with an opportunity to generate income and provides two reliable value sources – rental revenue and capital growth. Domestic and foreign investment in the real estate sector is at an all-time high in 2015 and with dramatic value swings commonplace in other investments arenas, further growth is anticipated in property markets around the world.

 

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