By Amanda Cooper and Dhara Ranasinghe
LONDON (Reuters) -Global markets have been sucked into a downdraft after U.S. President Donald Trump’s sweeping tariffs, setting investors’ go-to warning lights flickering but not yet flashing red.
S&P 500 companies have shed $5 trillion in stock market value, an all-time two-day plunge for the benchmark, surpassing a two-day loss of $3.3 trillion in March 2020, when the pandemic ripped across global markets.
So far, indicators of market stress reflect the nervousness that high volatility brings, but no signs yet of full-on panic.
VIX ON THE MOVE
Wall Street’s closely-watched fear gauge, the VIX volatility index, closed at a five-year high on Friday, a sign of elevated anxiety.
But even after this week’s spike, the VIX – at around 40 points – remains well below levels seen during the COVID crisis and in 2008.
The MOVE bond index, the benchmark for rate volatility, advanced to 125.71 on Friday, the highest since the November presidential election. That level reflected expectations Treasury yields across most maturities will move an average of 8 basis points (bps) per day in either direction over the next 30 days.
BONDS SHINE
One classic indicator of market stress is investors piling into safe-haven government bonds and so Friday’s fall in U.S. two-year Treasury yields, which at one point dropped 20 bps, and the 15 bps fall in German Bund yields are notable.
Over the last two days, two-year Treasury yields have fallen 26 bps, their biggest two-day move since August.
Treasuries gave up some gains on Friday, pushing yields off their lowest levels.
Still, analysts said the world’s biggest government bond markets appeared to be functioning well.
“There are no concerns right now on that front (trading conditions), it’s all very orderly. There’s no stress in that sense,” said PIMCO fund manager Konstantin Veit.
BANKS WOBBLE
Japanese megabanks ended the week with the biggest losses since 2008 in one of the markets’ most unsettling signals so far about the consequences of Trump’s trade war.
European and U.S. banks slumped over 8% and 7% respectively on Friday and the cost of protecting against bank defaults has risen.
“Sentiment is driving bank equities down, there’s profit taking, there’s worries about global growth,” said Altaf Kassam, Europe head of investment strategy and research, State Street Global Advisors. “But it doesn’t feel like a genuine credit or liquidity crunch right now.”
CROSS-CURRENCY BASIS SWAPS
These derivatives measure non-U.S. investor demand for the dollar, which is often the safe haven of choice in times of turmoil. This dynamic is not playing out at all right now, as investors shun the dollar and snap up the yen and the Swiss franc.
