Wow. We were expecting a pounding, but nothing like that.

The blood on the floor from the first few hours of trading on the ASX had barely started drying when the Chinese Market opened and the Shanghai Composite (SCOMP) was hammered 8.5% in a session.

This sent alarm bells ringing around the globe. It was last week’s drop of 11% for the SCOMP that sent Wall Street into a tailspin on Friday. Now, we were seeing the cycle kick off again with China selling fast, Europe getting caught in the rush and the US following suit.

So fast was the sell-off in the United States that the NASDAQ – possibly the only major indice almost as volatile as Shanghai – suspended trading once the drop hit 5%.

 

Source: ASX

 

Which begs the question, why?

As discussed yesterday, the SCOMP is in no way a direct representation of the broader Chinese economy. Sure, there are some concerns that real growth in China is below 5% compared to the Government-approved statements of around 7%, but in the long term, sustained medium growth in China is a much better outcome for the global economy than the constant shocks it is experiencing now.

Many Chinese investors are learning the lessons of a superheated SCOMP coming off the boil, and algorithms all over the world that have never seen something like this are responding in the only way they know how – SELL!

As the humans step in, and the computers recognise the opportunities presented by such a plunge, there will be plenty of bargains out there to take advantage of.

 

 

For investors

While still quite a correction, this week is nothing like the Global Financial Crisis. The pundits seem to recommend that everyone sits tight and doesn’t panic, however be sure to take correct advice from your investment advisor regarding you long term priorities and strategies.