A volatile week across global stock markets has escalated into a heavy sell-off, with European stock markets plunging to their lowest level in 20 months on Thursday. In the UK, the FTSE 100 entered correction territory – falling 10% from its peak in May - after Wall Street suffered its biggest drop in eight months on Wednesday.

Why are markets falling?

The sell-off is being fuelled by mounting investor concern over rising US interest rates, which could curtail growth in the world’s biggest economy and have a damaging knock-on effect for global growth.

The yield, or interest payment to investors, on two-year US government bonds hit the highest level since 2008, in a sign of the rising borrowing costs for companies and consumers. Donald Trump also raised eyebrows among investors by branding the US Federal Reserve “crazy” for planning further rate rises.

The US economy is booming, propelled further by Trump’s tax cuts earlier this year, which has prompted the US central bank to raise interest rates to keep a lid on inflation. Many economists are however now starting to warn that the economy is reaching a peak ahead of a slowdown next year.

Raising interest rates further could exacerbate that slowdown, although the increases may be necessary to curb additional inflation from rising oil prices and higher import costs in the US from Trump’s trade tariffs.

Meanwhile, the International Monetary Fund has downgraded its forecast for global growth forecast and warned that Trump’s trade war with China and Europe was partly to blame for the revision.

Is this the start of a deeper sell-off?

The omens are not good. Overall global debt, in both the public and private sectors, has rocketed by 60% in the decade since the financial crisis to reach an all-time high of $182tn (£139tn).

The boom in borrowing comes after central banks around the world slashed their interest rates close to zero during the financial crisis in an attempt to stop the last recession turning into another great depression.

Although it worked in the short term, the debt mountain created since has primed a tinderbox for an even bigger meltdown. Whether this happens or not depends on how quickly borrowing costs rise and how well the world economy adapts.

What are the reasons for optimism?

Fears over rising interest rates are nothing new. Stock markets had a bad run over the same concerns in February, before rallying back towards record highs over the course of the summer.

Economists say the solid, positive fundamentals of the US economy have not changed, such as the lowest unemployment rate since 1969. That strength could be confirmed in the next few weeks in third-quarter earnings updates from the world’s biggest companies.

What other problems are lurking?

Despite the reasons for optimism, there are a handful of risks to the global economy that could further derail financial markets.

Slowing growth in China could act as a drag on the global economy, given its status as one of the biggest buyers of goods from elsewhere around the world, while the country is also at risk from a massive buildup of debt that could trigger a financial crisis.

Emerging markets have seen their currencies plunge against a strengthening dollar, while investors have become concerned that these developing nations may be unable to repay loans taken out in the US national currency. Many, including Argentina, are now likely to fall into recession.

The populist Italian government is also engaged in a standoff with the EU over its budget plans, which has the potential to unsettle the wider eurozone. Borrowing costs Italy have hit a five-year high and the Milan stock exchange has fallen sharply in recent weeks.