Australian stocks have closed down 3.7 per cent today, wiping more than $100 billion from the stock market.

That’s the biggest fall since the pandemic lockdown era. Back then, financial markets panic spread like wildfire.

Now, global financial markets are nervous, to say the least.

It was unclear, for days, if not weeks, how severely economies would be hit by locking everything down. That uncertainty was too much for financial markets to bear, and stock markets across the world, including in Australia, “crashed” — down 20 per cent or more.

Now, investors are nervous about the health of the US economy following a couple of worse-than-expected economic releases, but there’s something else here at play that could undo the global financial system. More on that later.

For now, what’s the problem with the US economy?

How a ‘Goldilocks scenario’ turned sour

This time last week investors were enjoying a record run in share prices.

Indeed, the Australian and US stock markets were regularly setting fresh all-time highs.

It was what analysts call a “Goldilocks scenario”.

That is, the US Federal Reserve — Australia’s equivalent of the Reserve Bank — it was thought, had raised interest rates just enough to cool inflation while maintaining solid and sustainable economic growth.

It reached a point late last week that financial markets were convinced the US Fed — as it’s known — would proceed with cutting interest rates.

This was seen as positive for shares, especially given renewed capacity big corporations would then have to borrow and invest or pay down debt.

Then it all turned sour.

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Two separate US labour market reports (Initial Jobless claims on Thursday and non-farm payroll data on Friday) confirmed many more Americans were out of work than previously thought.

Adding to the economic pessimism, a separate report showed the US manufacturing sector was weak and contracting.

The “Manufacturing PMI” (July) came in at 46.8. The market was expecting 48.8.

It means the backbone of the US economy is contracting, and at an accelerating pace.

US stocks have fallen sharply in response, and Australian investors have taken their lead from that.

A market in ‘freefall’ forcing investors out

The selling pressure on the Australian Securities Exchange (ASX) today has been relentless.

“ASX 200 tumbling again with concerns now spreading to Asian markets,” Marcus Today markets analyst Henry Jennings said.

And that reference to Asian markets is critical, and the “something else at play” I mentioned above.

Japan’s benchmark stock index opened down 7 per cent. That’s a share market dive in anybody’s language.

Here’s the key problem in Japan: investors are being hit with what are known as “margin calls”.