Markets in Turmoil: A Perfect Storm of Trade Jitters and AI Bubble Concerns
In a dramatic turn of events, the financial world witnessed a tumultuous Friday as escalating trade tensions between the US and China sent shockwaves through global markets. The day's developments left investors reeling, with stocks, oil, and cryptocurrencies taking a beating, while a rush to the perceived safety of US Treasuries and gold ensued.
President Trump's threat of a massive tariff increase on Chinese goods sent Wall Street into a tailspin, capping off an already volatile week marked by growing concerns over an AI bubble. The S&P 500 plummeted by 2.7%, while the tech-focused Nasdaq 100 suffered an even steeper decline of 3.5%. The dollar, which had been on an upward trajectory, slid at the end of its best week this year, and crude oil prices plunged by over 4%.
Trump's remarks, citing recent "hostile" export controls by China, sent a clear message to investors: he saw no reason to meet with Chinese President Xi Jinping. This statement, made via social media, followed a series of moves by both countries to potentially restrict the flow of technology and materials, adding fuel to the fire ahead of their planned meeting later this month.
"Traders were clearly not prepared for this," said Steve Sosnick of Interactive Brokers. "The reaction speaks volumes about the market's recent complacency and its potential ramifications." Indeed, the rarity of such significant downward moves in risky assets may have contributed to the jarring nature of Friday's events.
Since the tariff-induced meltdown in April, the S&P 500 had been on a surge, driven by optimism around AI and hopes for Federal Reserve rate cuts. However, the gauge is now trading at one of its highest valuations in 25 years, leaving little room for error.
The S&P 500's worst day since April was a stark sign of the market's stress. The VIX, a key volatility indicator, topped 21, and the yield on 10-year Treasuries dropped to 4.03%. Bitcoin, too, felt the impact, dropping by around 5.5%. Commodities, including copper, soybeans, wheat, and cotton, all slumped.
"Greed has been outpacing fear in the US equity market this summer," said Michael O'Rourke of JonesTrading. "The high level of complacency leaves investors vulnerable, and this sell-off has the potential to evolve into a larger correction, especially if the US-China trade truce collapses."
Trump's post is just the latest in a series of moves by both countries to gain an edge ahead of their planned meeting. Michael Hirson and Houze Song of 22V Research noted, "This is a critical moment for global supply chains, including those powering AI. However, neither side has yet implemented their threatened measures, leaving a window for de-escalation. Trump faces significant political risks if he follows through on his threats."
October, known for its volatility, lived up to its reputation. Chris Zaccarelli of Northlight Asset Management noted that the sell-off many had anticipated finally arrived. "More volatility is possible in the coming weeks, but barring a significant economic hit, the market should rebound later this year, potentially vindicating October dip-buyers."
Michael Bailey of FBB Capital Partners suggested that investors may be using Trump's new tariff threats as an excuse to sell off AI-related stocks, which have been performing exceptionally well this year. "Tariffs have had little impact on the breakneck pace of AI companies, so today's concerns are somewhat surprising."
From a technical perspective, Dan Wantrobski of Janney Montgomery Scott noted that Friday's pullback was not entirely unexpected. "We anticipated air pockets of this nature due to overbought conditions, negative divergences, crowded positioning, and high headline risk."
Wantrobski added that the sell-off has pushed many short-term trading charts into "moderately oversold" territory, potentially signaling bounces in the coming days. "We expect corrective activity of 5% to 10% from recent highs due to overbought chart conditions, but our model does not predict a structural downturn in the US equity cycle until 2025."
Mark Newton of Fundstrat Global Advisors suggested that Friday's deterioration may lead to a fall sell-off, despite the possibility of a bounce next week. "It's important to remain vigilant as cross-asset volatility has begun, likely persisting over the next month."
The escalation of trade tensions comes at a time when calls for a breather in the equity rally were growing. The S&P 500, which has almost doubled in three years, was ripe for a pullback.
"Today's trade threats from President Trump to China were the tipping point for a broad sell-off in equities," said Charlie Ripley of Allianz Investment Management. "While big threats don't always lead to big actions, the shift in sentiment on US-China trade relations is unlikely to undermine the market's recent momentum."
The market's ebullience has led investors to flock to various assets, including stocks, bonds, and cryptocurrencies. Global equity funds attracted $20 billion in the week through October 8, while $25.6 billion flowed into bonds, according to Bank of America Corp. Crypto funds saw inflows of $5.5 billion, and even cash funds added almost $73 billion, indicating investors' dry powder.
"The reversal of equities was the bigger effect," said Andrew Brenner of NatAlliance Securities. "It gave the bond markets more of a bid."
As traders sought the safety of bonds on Friday, Treasuries rose across maturities. "Investors are seeking safe havens as a heavy levy increase could impact corporate earnings and the economic outlook," said Jose Torres of Interactive Brokers.
The tariff threat and market reaction echoed the behavior seen in April when the Trump administration's sweeping levy agenda sent the stock market into a tailspin, driving demand for Treasuries.
The dollar dropped against most developed-market peers on Friday, despite climbing about 1% for the week.
Corporate Highlights:
- Tesla Inc.'s shipments from its Shanghai factory increased in September as China's car market entered its busy sales period.
- Alphabet Inc.'s Google became the first company designated with strategic market status in the UK, subjecting its online search and advertising business to closer scrutiny by the country's antitrust watchdog.
- China imposed new port fees on US ships and launched an antitrust investigation into Qualcomm Inc., the latest in a series of tit-for-tat moves ahead of a key meeting between Presidents Xi Jinping and Donald Trump.
- Chevron Corp. seeks permission to drill up to 10 wells offshore Namibia, one of Africa's busiest exploration hotspots for oil and gas.
- Mosaic Co. reported that third-quarter phosphate production fell below expectations due to mechanical issues and utility interruptions.
- Leaders at AI computing company CoreWeave Inc. sold shares worth over $1 billion after a lockup period, becoming one of the top 10 individual insider sellers of the third quarter.
- AstraZeneca Plc is expected to announce a deal with President Trump to slash drug prices, following in the footsteps of another pharmaceutical company advancing the administration's health priorities.
- Stellantis NV's third-quarter shipments climbed 13%, led by North America, indicating a recovery after the carmaker worked down US inventory.
- Carlyle Inc. agreed to take control of BASF SE's coatings business, creating a standalone company valued at €7.7 billion ($8.9 billion).
- BlackRock Inc.'s actively managed funds are set to accept BBVA SA's takeover bid for Banco Sabadell SA and tender their shares as the offer period nears its end.
Bloomberg Strategists' Take:
"President Trump's escalating rhetoric on China, coupled with rising credit stress and tech bubble concerns, creates a toxic environment that could further derail stocks as a new earnings season begins."
Market Moves:
- Stocks: The S&P 500 fell 2.7%, the Nasdaq 100 dropped 3.5%, the Dow Jones Industrial Average declined 1.9%, the MSCI World Index fell 2.3%, and the Bloomberg Magnificent 7 Total Return Index declined 3.8%.
- Currencies: The Bloomberg Dollar Spot Index dropped 0.2%, the euro rose to $1.1619, the British pound strengthened to $1.3360, and the Japanese yen appreciated to 151.19 per dollar.
- Cryptocurrencies: Bitcoin fell to $114,341.45, a decline of 5.6%, and Ether dropped to $3,870, a decline of 11%.
- Bonds: The yield on 10-year Treasuries decreased to 4.03%, Germany's 10-year yield fell to 2.64%, and Britain's 10-year yield declined to 4.67%.
- Commodities: West Texas Intermediate crude fell to $58.84 per barrel, a decline of 4.3%, and spot gold rose to $4,010.09 per ounce.
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