It all started in China, as Reuters reports.
Stocks plummeted and safe-haven government bonds surged around the globe on Tuesday after the biggest daily loss in a decade on China's main stock market and weak U.S. manufacturing data sent investors running for the exit on risky trades.
The Shanghai Composite index sank 8.8 percent, in part on fears Chinese authorities would crack down on the speculation that drove the index to record highs this week. Other stock markets then fell like dominoes.
The Dow Jones industrial average and the Standard & Poor's 500 Index both closed down more than 3 percent, their biggest one-day percentage drops in almost four years, while the Nasdaq suffered its biggest fall since December 2002.
... A main measure of investor fear, the Chicago Board Options Exchange volatility index, shot up more than 60 percent, topping the gain that occurred right after U.S. markets reopened following the Sept 11, 2001, attacks.
In currency markets, the Japanese yen had its biggest daily gain since at least December 2005 after the jump in market volatility caused investors to cash in their carry trades -- a popular strategy in which investors borrow a low-yielding currency to fund investments in higher-yielding regions...
The FTSEurofirst 300 index of leading European shares closed 2.86 percent lower at 1,506.05, the lowest level since Jan. 11, erasing nearly two thirds of its gains since the start of 2007.
US economic data did not help sentiment yesterday.
The selling in European and U.S. equities was exacerbated by U.S. government data showing a 7.8 percent drop in orders of durable goods. Nondefense goods orders had their biggest monthly drop on record.
On the reason for the sell-off, Barry Ritholz says "Its not China, its the Economy". Well, I think it obviously is both, with the economy being the backdrop and the trigger being the sell-down in China. The economy alone seldom moves markets to the extent they did yesterday. And remember also that there are fundamental reasons why tightening in China could affect markets elsewhere, since China is one of those places that are widely acknowledged to be supplying financial markets with liquidity.