Traders have a new aphorism: “When the markets go down, the only thing that goes up is correlation.” That is an over-generalisation, of course, but Tuesday’s trans-global markets drama shows that it has more than an element of truth.

Chinese markets had their greatest falls in 10 years. The FTSE-100 had its worst fall in almost five, matched by similar falls across developed Europe. These indices are in positive territory for the year – so this is so far nothing more than a correction – but in the US, the Dow Jones Industrial Average actually moved into negative territory for the year.

When so many things happen at once, it is hard not to believe that they had some form of common cause. But beware of chronology. Monday was a largely unremarkable day for equities, and then Tuesday started with an epochal fall in China, followed by losses in other time zones as markets opened – but that does not mean that the Chinese fall, for which there was no obvious domestic trigger, caused the falls elsewhere.

China is a leveraged play on the habits of the US consumer. If US consumption stays robust, China gains disproportionately. At some point, traders were going to draw a link between the scary developments in the US subprime lending industry, and Chinese stocks. If there is less money available for US consumers, and it appears that there is, then they are going to spend less. That is bad news for China. So it is plausible to view the turmoil as a reaction to worries about US growth.

Further, the Chinese fall followed a run-up of more than 100 per cent over the previous year, which had brought equities to levels that were plainly unsustainable. With world markets more inter-connected thanks to the growth of various financial instruments, it is easier to act on a growth in aversion to risk. Traders alarmed by US sub-prime developments could respond by selling China.

This correction could turn into something worse, and emerging markets could suffer more than others. Whether this happens, though, depends primarily on the developed world, and particularly on the US and its credit market.

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