An ugly day for the markets. We saw two separate drops in our markets:
First: Last night in on the poor Chinese PMI, which moved unexpectedly to 49.6 (indicating contraction) from 50.5 in December. New orders, exports, employment and backlogs all saw declines; and
Second: This morning on the open.
What's going on? Concerns about Chinese growth, mostly. Most Chinese economic numbers have been below expectations for the past several weeks. The HSBC flash manufacturing PMI last night was another surprise. The fall was mainly due to a big drop in new orders, suggesting that domestic demand may be falling. There are also signs that inventory levels are high, not good if demand is moderating.
There also appears to be a bit of a credit crunch going on, and money seems to be very tight. The People's Bank of China had to inject large amounts of money into the economy this week to allay concerns of a shortage of cash ahead of the Chinese New Year.
The Dollar/Yen relationship is the key. The yen strengthened against the dollar overnight. The yen carry trade (borrow yen cheap, convert to dollars and invest) is one of the prime sources of funding for the U.S. stock market.
Many hedge funds are highly leveraged; they get some of that leverage from the yen carry trade. When the yen suddenly strengthens, it makes that trade more expensive, and at some point prohibitively expensive, which requires unwinds of the trade.
That means selling stocks with money bought from the carry trade, and it means bonds higher, gold rallies.
There's another issue: Stocks are expensive. I mean they are high-priced. The leading stocks are the speculative high-tech names. The price points of these stocks are in the stratosphere: Apple $548, Amazon $400, Visa $228, LinkedIn $217 and Tesla $179.
That means if you want to buy these stocks, you need a ton of capital. The yen carry trade becomes even more important.
Adding to the problem: Everyone is on the same side of the boat, so it creates problems because there are tons of offers and no bidders.
This is creating a lot of havoc in the currency world, and there are some specific issues affecting other countries as well:
—By CNBC's Bob Pisani