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The turmoil in global financial markets continued into Monday after last week’s losses surprised traders and market watchers.

China’s collapse early Monday morning continued the declines from last week and prompted the above selling in Europe and US markets. The Shanghai Composite and CSI300 both fell over 8 percent. Japan’s Nikkei fell almost 5 percent and Hong Kong was down over 5 percent.

S&P 500 Futures fell in the hours before US markets opened, indicating the major US benchmark index would open lower and continue falling. The index fell into 10 percent correction levels and was down over 100 points falling well below 1900 on the index, turning around near 1870 in early trading. By comparison, the markets were surprised on Friday when the index fell below 2000 for the first time since January.

The Dow Jones index was signaling an huge drop as well, down 850 points before trading opened early Monday. This was down from Friday’s close which was already down 530 points to end the week. The Dow Jones index also lost over 300 points on Thursday.

Futures for the S&P, Dow and NASDAQ were all stopped briefly and the New York Stock Exchange implemented Rule 48 “to arrange for the fair and orderly opening” of the market “in the event that extremely high market volatility is likely to have a Floor-wide impact”, basically slowing down losses amid the panic.

Despite this orderly opening, the Dow Jones declined almost 1100 points in early trading, down about 6.6 percent, scaring markets and financial media. The Dow index recovered about 1000 points of the drop but fell again and remained down over 3 percent on the day, losing almost 600 points.

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The S&P 500 was down over 5 percent during the day’s trading, recovered above 1900 but was still down over 3 percent as well in late activity, falling below 1900.

To put these losses in context, 1 percent moves up or down in daily trading are more appropriate, with 2 and 3 percent indicating major news events.

In Europe, losses were just as heavy earlier in the day before the US markets opened.

The German economy is considered the engine of Europe and concerns have been expressed that it won’t be enough to sustain growth across Europe. Germany’s DAX index lost over 4 percent on the day and is officially in a bear market, down about 22 percent from the record highs. A bear market is a 20 percent decline from the high of an index or price, much more significant than a 10 percent correction.

England’s FTSE 100 dropped almost 5 percent and is also firmly in a 10 percent correction off the highs.

Spain’s IBEX lost 5% on the day as did France’s CAC 40.

Europe’s Stoxx 600 was hit hard also, down over 5 percent on the day, but notice the sharp decline in August on the chart below.

econ-stoxx-600-rout-20150824

Why did these price swings happen?

The intensity of trading was in focus again today as Zero Hedge reported a measure to track change in the VIX volatility index was at record highs. To explain, the VIX volatility index measures the cost of insuring against losses in stock markets. The VVIX is the measure of how wildly that VIX index swings in trading. This layered metric of volatility was not only at a record, but nearly double the previous record during the Lehman crisis.

econ-record-vix-volatility-20150824

The normal VIX index hit 53, the highest level since 2009, and compares to low levels below 15 seen in recent weeks. This activity is usually indicative of a down trend in prices, sometimes huge losses. Today’s activity saw stocks recover some ground after these huge losses.

Stocks often recover part of a fall in prices because the drop is seen as a buying opportunity for the next positive trend and some of the activity is seen as motivated by that. Financial media speculated on the specific causes of the wild swings in prices, some blaming it on China’s slowdown, the false economic growth numbers and the devaluation of the Yuan, China’s currency. Others have pointed to the global uncertainty over if and when the Federal Reserve would raise interest rates, largely seen as what pushed stocks to such high prices after the 2008 financial crisis.

“Markets only believe there is a 24 percent chance, just a week ago, it was double that” Bloomberg’s Matt Miller on the likelihood the Federal Reserve will raise interest rates soon, based on Bloomberg’s World Interest Rate Probability function.

The other reason stocks rebounded is part of the same reason prices dropped so sharply at the market’s opening. As reported by Zero Hedge, prices on many premium stocks dropped fast as high frequency trading and algorithm decisions made by computer trading contributed to price gaps. Many major companies saw their stocks down over 20 percent at the start of trading Monday morning, only to recover the losses and then begin falling again.

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In many cases, the entities looking to sell are finding very few bids from buyers at a reasonable price. This is known as liquidity drying up in markets, leading to trades getting executed at distorted prices. Eric Scott Hunsader of financial data firm Nanex posted some graphical representations of how these market dislocations occur in relation to the lack of liquidity.

As Hunsader noted, there were more than 4,500 mini crash events today.

Hunsader later reported that over 100 stocks on the S&P 500 index traded in a 10% or larger range in the first 20 minutes of trading. In other words, 1 in 5 stocks on S&P “flash crashed”, referring to quick price gaps.

The massive surge in trading orders also caused a slowdown in the execution of trades, leading to many failed orders and price distortions. Rumors began spreading that many market participants were complaining of these problems throughout the day.

The other factors suggested are concerns about the flagging US consumer economy and the ongoing crash in the commodity index as noted earlier today.

WTF NEWS
2. The health of the global economy can be crudely measured based on the value of various commodities. At a macro level, it tracks the production and sale of raw materials like steel, copper, oil, and other materials needed for industrial commerce. Deflation is the mortal enemy of the fiat credit banking system and trillions of dollars of global trade lost as the price falls is a cumulative problem. The Bloomberg Commodity index is at its lowest level since 1999.

econ-commodity-index-1999-low-20150824

The irony is that zero interest rate policy from the Federal Reserve has largely driven activity from corporations to keep producing raw materials and selling them into an environment of declining demand leading to the downward price cycle. That, in combination with the other effects of Fed policy crushing the US and European consumer economy, has become a self-feeding cycle leading to an inevitable mathematical collapse. Some entities will be sacrificed along the way, like a bank, or a country, Greece to name one.

To reiterate the points made this morning, stock markets have been trending down worldwide, as well as currencies in the wake of the currency war. The US Dollar index is also under heavy pressure, note the steep drop at the end of this chart as the dollar has been falling sharply during August. The US Dollar index is measured against a basket of other currencies and has declined from over 100 into the low 90’s.

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As a reminder, the S&P 500 has broken its long term uptrend since the 2008 financial crisis and can be expected to go significantly lower.

econ-sp-500-trend-2009-20150727

Global markets are down, major European indices are down over 10 percent in the last month.

England’s FTSE 100: -10.35%
France’s CAC 40: -13.33%
Spain’s IBEX: -13.73%
Germany’s DAX: -14.97% (in a bear market, down 22% from highs)

The markets in over 50 countries are down significantly for the last month on Bloomberg’s Europe, Middle East & Africa Index list. Over 30 of those countries have losses of over 5 percent in the last month.

Brazil stock market and economy is in freefall, India’s SENSEX is down over 10 percent also.

3. The third graphic is a generic extension of the second point. This graphic has been shared in financial circles and it points to the seven year cycle that seems to be inescapable for the global economy.

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