Fear rips through financial markets as global trade war heats up

New York: Volatility across financial markets jumped on Friday, with Wall Street's top "fear gauge" soaring to an eight-month high while other market indicators showed growing investor concerns about the ripple effect of President Donald Trump's sweeping levies.

Global stock markets tumbled and oil prices dropped for a second day on Friday, with the Nasdaq Composite heading toward a bear market, as China imposed fresh tariffs on all US goods, sparking worries of an extended global trade war.

The Cboe Volatility Index, an options-based gauge of stock investors' anxiety about the market's near-term outlook, rose as much as 15.54 points to a 45.56, its highest since August.

The index was last up 11.97 points to 41.99.

"A VIX at 40 is a sign of fear for sure" said Joe Tigay, portfolio manager for Rational Equity Armor Fund.

"Usually you see a 40 when there's something more than the usual selloff ... some sort of credit risk, margin risk, something that could cause a contagion that could spill over and across to other asset classes," Tigay said.

Investors, who have been battered by a sharp selloff this year - the S&P 500 is down about 11% for the year - have been keeping an eye on the volatility gauge as an indicator of market stress.

On Friday, the jump in anxiety was broad with no market spared.

In currency markets, euro one-month implied volatility shot up to a one-year high of 9.68 as the common currency fell 1.1% against the dollar. The greenback has been smacked around by rapidly flowing news on Trump's tariffs and countermeasures from other countries.

"FX pricing has swung wildly and the dollar's movement has been the opposite of smooth," said Helen Given, director of trading at Monex USA in Washington.

Meanwhile, US Treasury yields went lower as a solid US jobs report soothed some nerves.

The yield on the benchmark US 10-year Treasury note fell to a six-month low of 3.86%, slipping below the widely watched 4% mark.

Safe-haven buying of Treasuries has sent yields, which move inversely to prices, down sharply in recent weeks, driven by concerns about recession and shifting expectations about potential Federal Reserve policy.

Trump's new tariffs are "larger than expected" and the economic fallout including higher inflation and slower growth likely will be as well, Federal Reserve Chair Jerome Powell said on Friday. Trump on Friday called on Powell to cut interest rates, saying it was the "perfect time" to do so.

Investors do not expect volatility to subside quickly.

"Until there's actually a change in the policy or evidence of real negotiations going on, the market's going to be under pressure," Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.

U.S. high yield corporate bond spreads, an important indicator of financial conditions, surged to 401 basis points as of late on Thursday, their highest since November 2023, as global markets swooned.

The short-term cost of insuring exposure to U.S. government debt has climbed, with spreads on U.S. six-month credit default swaps (CDS) - market-based gauges of the risk of a default - widening to 47.48 basis points as of Thursday, the highest since mid-November 2023, according to LSEG data.

Other indicators of market stress reflect the nervousness that high volatility brings, but no signs yet of full-on panic.

U.S. two-year swap spreads - the difference between two-year swap rates and the two-year Treasury yield - were set for their biggest one-day contraction on Friday since the March 2023 regional banking crisis.

Still, equities remained at the center of the market turmoil.

Hedge funds across the world on Thursday sold global equities on a net basis at the largest 1-day amount since 2010 amid a market meltdown, Goldman Sachs said in a note to clients on Friday.

The bank said portfolio managers mainly added bets against stocks on Thursday, although they also ditched long positions.

Global equity long/short hedge funds erased their gains for the year on Thursday and were down 4.2% on Friday morning, Goldman said in an intraday note.

Meanwhile, retail investors, following a "buy the dip" strategy, bought $4.7 billion in stocks on Thursday, the highest level over the past decade, JP Morgan said in a note.

"I'm just grateful I'm not on the equity side," Monex's Given said.