AI rout sets off market alarm signals as traders brace for what's next
SPY•A technology-stock rout tied to faltering confidence in the AI trade is testing global financial markets, with volatility and credit stress rising while bond and funding markets remain orderly. The VIX climbed above 28 and was up more than 40% for the week; high-yield credit premiums also increased.
1. Volatility rises
The Nasdaq 100 rose nearly 2% on Friday, recovering some of Thursday's more than 6% drop, but traders remained on edge. The VIX rose above 28 on Thursday, its highest since late March, and stayed near that level Friday; it has surged more than 40% this week. Europe's equivalent volatility index reached its highest level since May.
2. Credit stress builds
Credit default swap spreads on neocloud firm CoreWeave surged past 1,000 basis points to record highs, while spreads on SpaceX and Intel also jumped this week. The premium investors demand to hold high-yield corporate debt reached its highest since the Liberation Day market turmoil; premiums for companies rated CCC or lower were around their highest since 2020.
3. Safe-haven demand
US 10-year Treasury yields fell 50 basis points from peaks above 5% reached last month, and the US dollar was up 0.6% on Friday. Cash funds saw $140 billion in inflows in the week to Wednesday, the seventh biggest on record. Bond-market measures remained calm: the MOVE index had eased from its six-month high in October, and US swap spreads showed no signs of funding or liquidity stress.
