Monday was the day when the fear of the unknown truly gripped markets, with diminished August trading volumes serving to massively exacerbate moves. The major volatility stemmed from the kiwi at lunchtime during European trade, which in turn triggered a more than 3 big-figure move on USDJPY. It makes little sense to try and rationalise these moves as they are a function of stressed and illiquid markets. That said, it’s clear that markets are waking up to the implications of a sustained economic slowdown in China, combined with a government that is stepping back from intervention, including in the stock market where the rally they initiated is now. Overnight we’ve seen Chinese stocks continue to fall (although only by 7.5% this time) although most other Asian equity markets are in positive territory. Contagion and China are not normally words that go together. The correlation between the Shanghai composite index and the MSCI developed market index over the past two years has been exactly zero (rolling 1-month correlation). So the fact that we’ve seen correlations rise drastically over the past 2-3 weeks reflect a dramatic sea-change versus recent history.

For today, data will prove to be only a minor distraction from the fragile tone to markets. The German IFO data is seen at 08:00 GMT, with U.S. consumer confidence and provisional services PMI seen later the day. FX at least has seen a calmer Asia session, with a decent recovery in the Aussie dollar seen back above the 0.72 level and the yen continuing to weaken against the dollar after yesterday’s dramatic moves.