Unintended consequences: A market that almost fell apart

WHY BLOG ABOUT LAST NIGHT?

• Everyone is a little weary in the office today after another long night. We don’t normally blog on these sort of moves, after all it was in many respects a “Price is News” night – the news story of the night was the fall in prices, rather than say an event that leads to a fall (the Greece referendum say).
• But I want to revisit something that we wrote earlier in the year about what the coming next crisis might look like, based on what we saw in October of 2014. Readers can review it here. I did not expect to be writing this piece so soon after that, with our base case being that it was actual Fed hikes rather than the fear of  Fed hikes that caused this.
• So most readers this morning will of course have noticed that markets had a rough night. Perhaps what is less obvious, is that, AGAIN, below the surface, things were going awry at a scary pace leading into the US market open. To the point where we thought it could turn into 1987 quite quickly.

WHAT WERE THESE EVENTS THAT WORRIED YOU?

• Selling had continued across all time zones, with both Asia and Europe moving lower across the board. This then stabilised somewhat around 6pm to 9pm (Australian time), with a slight rally of the day’s lows. But selling accelerated from 9pm to 11pm and started to go vertical around 11:15pm At this point (the boxed area) trading was halted on the Chicago Mercantile Exchange (CME) at 11:21pm – where the world’s largest equity futures market trades (the Chinese aren’t the only ones who intervene) to give a pause.

• This then saw either machines or other traders switch to selling markets that they could, like the European Index, which was driven down 8%. But things were spilling over into currency markets at the same time (or alternatively they were spilling back into equity markets: around the same time the Japanese Yen, which is one of the world’s largest currency pairs, gapped 3% lower at 11:09pm. This is extremely hard to do given the volume of currency traded in this market, but it appears liquidity just dried up.