Two American regional banks, Western Alliance and Zions, are embroiled in an alleged fraud case, sparking fears of a new banking crisis and causing the S&P 500 to drop by over 1%.
The Return of the “Fear Gauge”
The VIX index, a gauge of market fear, soared to 28.99 points, its highest level since April. Investors are fleeing risk, opting for safe havens like gold and government bonds. In Europe, the Stoxx 600 plunged by 1.7%, dragged down by banks, while bond yields collapsed.
Geoffrey Yu, a strategist at BNY, mentions “a gradual rise in nervousness” and a “defensive rotation that has been underway for several weeks.” Traders, who not long ago saw an AI-driven market euphoria, are now retreating to safer assets.
Regional Banks in the Spotlight
The disclosure of potential losses by Western Alliance and Zions led to a 6.3% drop in the KBW Regional Banking Index on Thursday night. This move heightens concerns about credit health, already shaken by recent bankruptcies of auto lender Tricolor and parts manufacturer First Brands.
Result: traders are reducing their exposure, aware that “everything is overpriced,” according to Pooja Kumra, a rate strategist at TD Securities. A crack in the banking system could trigger a wave of massive sell-offs.
Gold Surges: Flight to Safe Havens
The yields on 10-year US Treasury bonds slipped to 3.96%, their lowest level since spring. Brent crude oil fell by 1.4%, dropping to $60.21 per barrel, while gold continues its meteoric rise: $4,340 per ounce, an 8% increase for the week, the strongest since Covid. A clear sign: fear outweighs greed.
The Swiss franc, the ultimate safe haven, further climbs by 0.5% against the dollar, now trading around 0.79 Swiss francs.
Shockwaves Reach Asia
Asian markets followed suit: the Hong Kong Hang Seng lost 2.5%, the Chinese CSI 300 fell by 2.3%, and the Japanese Topix dropped by 1%. Everywhere, the sentiment is the same: summer exuberance gives way to caution.
Emmanuel Cau, head of European equities strategy at Barclays, believes this correction is primarily “an opportunity to take profits.” However, the trend is clear: credit fears are setting in, along with the notion that the 2025 stock market rally may be coming to an end.
