By Saqib Iqbal Ahmed
NEW YORK (Reuters) -Alarm about the fallout from President Donald Trump's sweeping tariffs gripped global financial markets, with Wall Street's fear level at a five-year high while financial executives expressed shock and worry about economic growth.
Trillions were wiped off stock market values as investors said they were fearful about the risk of recession ahead. U.S. stock markets slumped more than 10 percent in two days, with the Nasdaq Composite now in a bear market, as China imposed fresh tariffs on all U.S. goods, sparking worries of an extended global trade war.
The tariffs prompted "shellshock" among business leaders weighing the potential economic damage, a senior financial executive said. Another executive described a typical industry response to the announcements: "Oh my God, terrible!" Both executives declined to be identified discussing the policies.
The Cboe Volatility Index, an options-based gauge of stock investors' anxiety about the market's near-term outlook, jumped 15.29 points to end at 45.31, its highest close since April 2020.
"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 nearly 14% for the year - have been keeping an eye on the volatility gauge as an indicator of market stress.
"Tariff uncertainty is likely to rattle markets for the foreseeable future," said Jeff O'Connor, head of market structure at Liquidnet.
Friday's 6% S&P 500 drop brought the index close to the 7% circuit breaker threshold that would have triggered a 15-minute trading halt, intended to pause panic selling to avoid a downward stock-market spiral.
Trump's team has characterized the market turbulence as an adjustment that would prove beneficial in the long run, with Treasury Secretary Scott Bessent linking the selloff to the emergence of China's DeepSeek artificial intelligence tool earlier this year.
The selloff was broad with everything from large-cap to small-cap stocks hemorrhaging. An index of expected stock market correlation closed at a 2-year high on Friday, underlining investors' view that stocks will continue to gyrate in sync.
FEAR IS EVERYWHERE
On Friday, the jump in anxiety was broad with no market spared.
In currency markets, euro one-month implied volatility shot up to a two-year high of 10.45 as the common currency fell about 1% against the dollar.
The greenback, which slumped to a six month low against a basket of currencies on Thursday, 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, U.S. Treasury yields fell, with the yield on the benchmark U.S. 10-year Treasury note falling 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," said 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.
Global hedge funds and levered exchange-traded funds (ETFs) dumped more than $40 billion of stocks at a breakneck pace, growing increasingly bearish, according to bank notes to clients on Friday.
JP Morgan said in a note that volatility targeting portfolios had between $25 billion and $30 billion in equities to sell in the coming days, as they unwind positions to reduce risk.
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.
"Given the 'elephant in the room' of tariffs which haven't led to any negotiation thus far, it's nearly impossible to call a bottom without evidence of proof," Mark Newton, head of technical strategy at Fundstrat Global Advisors, said in an note.
(Reporting by Saqib Iqbal Ahmed; Additional reporting by Abigail Summerville, Lananh Nguyen, Echo Wang, Chuck Mikolajczak, Suzanne McGee and Carolina Mandl; Editing by Megan Davies, Chizu Nomiyama, David Gregorio and Sandra Maler)
