Why global markets are in ‘free fall’

European stock markets reeling from an overnight sell-off in the US and Asia were heading for the worst drop since the Brexit referendum this morning, jolted by investor fears about interest rates and government bond yields.

As the Dow Jones gloom spread, the Stoxx Europe 600 index fell 3% in early trading in London, with “every sector in the red”, CNBC says. London’s FTSE 100 lost 3.5%, “with every constituent falling and financial stocks hit hardest at the sector level”, reports the Financial Times.

The drops come after Wall Street suffered its worst percentage fall since August 2011: the Dow finished 4.6%, or 1,175 points, lower on Monday. The rout then swept across Asia, with Hong Kong’s Hang Seng Index down 4.2% and Japan’s Nikkei slumping 4.7%.

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Analysts scrambled to explain the global losses.

Reuters says the “trigger” was US data released on Friday that showed wages rising at the fastest rate since 2009, with an annual increase of 2.9%, sparking worries about inflation and higher interest rates and leading to a sharp rise in US bond yields.

But according to Bloomberg, multiple factors are to blame. “As with plane crashes, the experts are pointing to a confluence of factors, from concerns over the path of Federal Reserve interest rate increases to a rapid unwinding of trades predicated on continued low volatility in markets,” says the website.

CNBC argues that while “no particular piece of news” may have pushed major US indexes into the red, shifts in the bond market created “volatility and concern” that inflation might kick in faster than expected.

Economists and analysts have been warning for weeks that inflation levels in major economies could increase beyond the 2% to 3% that central banks believe is good for developed countries, The Guardian reports.

Australia’s ABC News takes the long view about why markets are in “free fall”, blaming American investors who boosted Wall Street to record levels - aided by the US Federal Reserve, which cut interest rates to zero and pumped more than $3trn into the economy. Much of the extra cash floating around flooded into bond and stock markets, inflating values and and distorting returns.

“The party had to come to an end at some stage, and it appears that happened last week,” the website concludes.