Stock market falls, factors stoking global economic fears

The U.S. stock market closed at its worst performance in 18 months on Thursday, driven lower by another down in Chinese shares and heavy selling by technical traders. Markets have become increasingly nervous day by day for the global economy, especially with signs that the Chinese economy is slowing. The devaluation of China's currency (yuan) last week has taken many by surprise, and the Chinese stock market has continued showing big fluctuations despite efforts by Beijing to calm the economic atmosphere. Fears are increasing that the world’s second-biggest economy could cause the next recession as the China’s growth is slowing.

The other most important reason is very low US interest rates have helped fuel booms in assets such as property and shares after investors, searching for a return, ignored cash and put their money into alternatives. The US central bank, the Federal Reserve, has been indicating for months that the first rate rise in almost a decade is emerging. This has affected huge movements of capital as investors fear a rising cost of lending will affect business borrowing and consumer spending.

Although oil prices appeared to stabilise on Thursday, they had fallen sharply on the day before following the release of data showing that US oil stockpiles were higher than expected. The price of oil has fallen more than half over the past year, due to a combination of increased supplies and slowing demand. The low oil prices are creating a significant pressure on economies that are dependent on oil revenues.

Yesterday, Greece's Prime Minister Alexis Tsipras has announced his resignation and has called for an early election. The Greek market was in crises a few days before and this election announcement affected the European market.

The Indian markets have been strongly affected over fear that the government and capital markets regulator securities and Exchange Board of India (Sebi) will crack down on P-notes. A P-note is a derivative instrument issued by a foreign portfolio investor (FPI) against underlying Indian securities which allows these investors to earn returns on investment in the Indian market without undergoing the significant cost of directly investing in India.

After China unexpectedly devalued its currency last week, coupled with the sudden depreciation of China’s renminbi, it is worth looking at the link between currency values and trade agreements. China’s currency last week dropped by a cumulative 4.4 per cent against the U.S. dollar, making Chinese exports cheaper and imports into China more expensive by that amount. The Rupee along with other global currencies have depreciated.