Beware of the Rising (.VIX)

Trump U-Turn reweighs volatility

April 10, 2025 1:44 PM 

Source: REUTERS

Edited by Yiannis Damellos

U.S. President Donald Trump's reversal on tariffs has created significant volatility in the markets, causing investors to rapidly shift between stocks and safe havens. While previous crises have led to larger market moves, few have occurred at such a swift pace.

On Wednesday, Trump announced that he would temporarily reduce the high tariffs imposed on numerous countries while increasing pressure on China. This decision triggered one of the most dramatic market shifts since the onset of the COVID crisis in 2020.

In periods of volatility, the speed of market movements often raises alarm. The swings observed in the markets during April have been comparable in intensity to those seen in 2020 and are echoing the volatility of the 2008 financial crisis, but they have unfolded in a much shorter time frame.

Here’s how the market movements have developed since Trump's tariff announcement on April 2:

A speed contest

Equity markets around the world experienced a rebound on Wednesday and Thursday following Trump's announcement to pause certain actions. The S&P 500 surged by 9.5% on Wednesday, marking its largest daily gain since 2008, while European markets staged their biggest jump since March 2020 on Thursday.

However, most major indexes still remain below the levels observed at Trump's "Liberation Day" announcement, and they have endured some of the steepest declines in years. For instance, Hong Kong shares plummeted by 13% on Monday, representing their largest drop since 1997. Additionally, the STOXX 600 index in Europe and the S&P 500 both experienced their steepest three-day declines since the onset of the COVID-19 pandemic.

"We are witnessing levels of uncertainty and volatility that we haven't seen since the global financial crisis," said George Lagarias, chief economist at Forvis Mazars. "These levels of volatility are detrimental to financial markets and risk causing dislocations," he added.

Line chart of S&P and Nasdaq performance

Line chart showing implementation of STOXX 600

Bond Market Blues

The U.S. bond market has been significantly affected by recent fluctuations as investors, concerned about the impact of tariffs on the U.S. economy and the potential harm to the stability of U.S. assets, sold off Treasuries. 

Following April 2, ten-year Treasury yields, which had fallen by 30 basis points, experienced a rise of as much as 25 basis points on Wednesday, only to drop almost immediately after news of a pause in tariff implementation was announced. 

Between April 2 and the peak on April 9, yields increased by as much as 36 basis points, and they are currently 14 basis points higher than before. During the COVID crisis in early 2020, yields fell by as much as 120 basis points before rebounding to trade approximately 100 basis points higher once the worst of the crisis passed.

A Line chart showing the moves in the US 10-year Treasury note from April 2 to April 10

Is the dollar still green?

The dollar has not served as a safe haven in the foreign exchange market and has declined against several major currencies since April 1. It has lost nearly 5% against the Swiss franc and almost 3% against both the Japanese yen and the euro. In terms of volatility, traders are rushing to secure protection against significant price fluctuations, especially since the impact of upcoming tariff announcements may be unclear. Since April 2, the dollar has experienced a round trip against a basket of currencies similar to what it went through during the COVID period, but this time it has happened in a much shorter span.

Bar chart showing 3-month options volatility on a range of major currencies on April 1 and April 10

Banks: Flip-Flop to the Rescue

Global banks have been facing challenges due to concerns about a slowdown in global growth and the possibility of accelerated interest rate cuts following Trump's tariff plans. This situation initially caused shares to plunge, but they rebounded after Trump announced a pause on the tariffs.

 

The U.S. KBW Bank Index (.BKX) experienced a significant drop of nearly 16% in just two days, marking its largest decline since March 2020. Similarly, European lenders (.SX7P) saw their steepest decline since 2020, occurring two days after "Liberation Day."

 

This downturn was surprising, especially since the banking sector had previously thrived on higher interest rates, a strong U.S. economy, and improved growth in Europe. As recession risks grew, markets quickly adjusted their expectations, pricing in potential rate cuts from both the European Central Bank and the Federal Reserve. However, some of these expectations have since softened.

 

Recently, banking shares have rebounded significantly. On Wednesday, the KBW Bank Index surged by 9%, marking its largest single-day increase since Trump's re-election in November. European bank stocks also rallied, rising nearly 7% on Thursday and on track for their biggest one-day gain since the rebound in March 2022, following Russia's invasion of Ukraine.

Line chart of STOXX Europe 600 Banks Index

Line chart of US KBW Banks Index

Beware of the rising (.VIX)

There have been times when markets have moved more dramatically in one direction or another, but few periods have experienced such rapid changes. The VIX index (.VIX), which reflects how much investors are seeking protection against volatility, has reached crisis levels. It soared to a high of 60 this week, a level seen only three times since the index was established in 1990: during a sharp market selloff in August 2020 and again in 2008. Since then, the index has dropped closer to 35, indicating that the fluctuations over the past three days have been among the fastest on record.

An orange line chart showing the history of the VIX index from 2006 to now