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The market is displaying a number of stress indicators

The signs of financial stress have begun to shine brightly as a global rout on the equity markets intensified Monday amid tariff tensions.

Van Luu is the global head of FX strategy and fixed income at Russell Investments.

The asset manager’s gauge of risk aversion for investors, which includes pricing trends and sentiment indicator, is approaching levels seen last in September-October of 2022 when global central banks began an unprecedented rate hike cycle.

Take a look at some of the key indicators that investors are keeping an eye on.

VIX JUMPS

The VIX volatility index - Wall Street's fear gauge - jumped to its highest level ever on Monday, reaching 60 – the highest since August, when global markets began to fall. The VIX volatility index closed above 45 for the first since the 2020 COVID-19 crises, and it was the biggest jump in a single-day since then.

In Europe, an indicator similar to the Euro STOXX Volatility Index was poised for its largest one-day increase in absolute terms since the depths the global financial crisis, October 2008.

DOLLAR DEMAND

The demand for dollars from non-U.S. participants has risen, which is a sign that the market needs cash. The rate of three-month euro cross-currency swaps A derivative that reflects the demand for dollars, has traded at around -7.5%, down from 12.5% one week earlier. This is its lowest level since late 2023. A more negative number indicates higher demand for dollars.

JUNK IT

The spreads on junk bonds, which represent the premium that investors receive for holding riskier corporate debt compared with government bonds, are at multi-month highs.

The iTRAXX Crossover Index, an index of European junk bonds with a five-year maturity, jumped above 420 basis point on Monday. It was the largest rise in one day since March 2023, and it reached its highest level since November, that same year. It is also nearly 80 basis point higher than a week earlier.

The ICE BofA U.S. High Yield Index, which measures the performance of high-yield bonds in the United States, ended the week with its lowest level since September and its biggest weekly decline since September 2022.

BANKS SLIDE

Share prices of global banks, which are key to the growth and functioning of the world economy, continue to fall steeply.

In the last three trading days, European and Japanese banks have lost roughly 20% each of their value. Japanese banks closed Monday 10% lower, while U.S. bank stocks dropped 15% in the past week.

SWAP SPREADs

Swap spreads are a sign that the pressure is building on the U.S. government bond market. It is the largest in the world with $28 trillion of outstanding debt. The swap spreads capture the premium of the fixed-rate side of an interest rate swap that investors use to hedge rates risk relative bond yields.

U.S. Two-Year Swap Spreads, the difference between the two-year Treasury rate and two-year exchange rates, briefly fell to almost -46% basis points before pulling back at around -24bps. This is near the tightest level since November.

(source: Reuters)