Black Monday: why did it happen, what does it mean, where next?

Traders returning to their desks after their summer holidays yesterday hardly had time to take off their coats, never mind ease themselves back in. The big falls in China overnight led to a savage early sell-off in European markets and an extraordinary 1,000-point, or 6.6 per cent, drop in the Dow Jones index of US shares straight after opening.

There was later a significant recovery in the US. The volatility may partly reflect thin summer trading volumes, but nerves remain very much on edge.

How do you explain the huge volatility of recent days?

Big share swings are always hard to explain and often appear to have little enough link to real economic data.

Markets are driven by “fear and greed”, as the economist JM Keynes famously observed. Fear has been the dominant factor in recent days, mainly relating to what is happening in China and its implications for the world economy and growth. China is still growing, even if the official figures on the rate of expansion are suspect, which is important to remember.

A minority of analysts have warned for some time that markets were overvalued, and there was something close to panic early on in the US yesterday. However, many of the bigger brokerages continue to argue that growth in the US, the UK and eventually Europe will support shares.

Perhaps reflecting this, there was some settling in prices later in the day yesterday, though European markets still ended 4.5 to 5.5 per cent lower, the biggest one-day decline since the 2008 crisis and a significant fall when added to last week’s losses.

Much today will depend on what has happened in Asia overnight. Trying to predict where this is going, particularly in the short term, is almost impossible. One of the strange factors has been a rise in the value of the euro, though this can be partly explained by expectations that US and UK rate increases will be delayed, which have hit sterling and the dollar.

However, rates in the euro zone will stay at rock-bottom levels for even longer.

What will drive the markets over the next few days?

As fears about growth in China are a key factor, every piece of data and information emerging from that economy will now be scrutinised. So will the wider impact of slower Chinese growth and falling commodity prices on the other emerging economies.

The Chinese authorities are in the market, supporting their currency from falling further, but may not have the firepower to support shares are well, so more volatility is likely.

In the US, meanwhile, the Federal Reserve Board now faces the choice of whether to start increasing interest rates – at rock-bottom levels since 2008 – next month.

It may hold off, perhaps even until next year, but cannot do so forever. One of the market’s worries is that neither central banks nor governments have much scope to bolster growth, should this be needed.

More sanguine analysts believe that the revival of consumer spending in the US will support recovery and that growth in Europe will eventually follow.

Economic data, as we move into the autumn, will therefore be closely analysed in an effort to see whether the recoveries in the US and the UK are sustainable and whether there are real signs of life in the euro zone.

What stocks are particularly exposed?

Few shares escaped the meltdown in Europe yesterday, as pretty much every company relies on economic growth to make money. More seriously affected are commodity producers and oil companies, following the major fall in the price of oil and other commodities. Stocks exposed to emerging markets, and particularly China, have also taken a significant hit.

What does this mean for Ireland?

Clearly any major global slowdown would hit Ireland, affecting growth and jobs and making the budget numbers more difficult. Broadly, each percentage point hit to world growth is thought to have a matching impact here, though recently Ireland has seemed to decouple itself from external trends and has reported strong growth. It is way too early to predict the implications for growth here, though the market upheaval does illustrate the risks.

At the moment the budget numbers look solid and should not be under threat. However, a major international reversal would see nervousness hitting home here eventually.

Lower oil prices and the likelihood that international interest rates will remain lower for longer are good news for Ireland, as an oil importer and an indebted country.

But the rise in the value of the euro, which had not been expected, will – if sustained – have a negative impact on Irish exporters to non euro-zone markets such as the UK and US.