Market stress signals are flashing bright

LONDON (Reuters) - As a rout in global equity markets deepened on Monday amid tariff turmoil, the signs of stress across financial markets have started to flash brightly.

"It's quite clear that the market is in a panic," said Van Luu, global head of FX and fixed income strategy, Russell Investments.

The asset manager's gauge of investor risk aversion, which incorporates pricing trends and sentiment indicators, was approaching levels last seen in September-October 2022, when global central banks started an unprecedented run of interest rate hikes.

Here's a look at just some of the indicators on investors' watchlist.

VIX JUMPS

Wall Street's closely watched fear gauge, the VIX volatility index, jumped to 60 on Monday - its highest level since a global market selloff in August. It closed above 45 on Friday for the first time since the 2020 COVID-19 crisis, and jumped the most on a single day since then.

In Europe, a similar indicator -- the Euro STOXX Volatility Index -- was set for its biggest one-day surge in absolute terms since October 2008, the depths of the global financial crisis.

DOLLAR DEMAND

Demand from non-U.S. investors for dollars has surged, a typical sign that market participants need cash. The rate on three-month cross-currency basis swaps for the euro <EURCBS3M=PMID >, a derivative that reflects this demand, traded around -7% from above 12.5% a week ago, its most negative since late 2023. A more negative number indicates higher demand for dollars.

JUNK IT

Junk bond spreads, which reflect the premium investors get for owning riskier corporate debt, compared to government bonds, have blown out to multi-month highs.

On Monday, the iTRAXX Crossover Index an index of five-year European junk bonds, leapt above 420 basis points in its largest one-day rise since March 2023 and to its highest since November that year and nearly 80 basis points higher than it was a week ago.

In the United States, the ICE BofA U.S. High Yield Index ended last week at its lowest since September, having posted its largest weekly drop since September 2022.

BANKS SLIDE

Global banks, key to the functioning of the global economy and a barometer for growth, continue to suffer steep share price falls.

European and Japanese bank stocks have shed roughly 20% of their value each in the last three trading sessions alone. Japanese banks closed 10% lower on Monday, while U.S. banks slid some 15% last week in their biggest weekly drop since 2020.

SWAP SPREADS

The pressure building in the U.S. bond market, the world's biggest with some $28 trillion in outstanding government debt, is starting to become apparent and one sign of strain is in swap spreads. They capture the premium on the fixed side of an interest-rate swap, which investors use to hedge against rates risk relative to bond yields.

U.S. two-year swap spreads - the difference between two-year swap rates and the two-year Treasury yield - briefly dropped to almost -46 basis points on Monday before pulling back to around -24 bps -- near its tightest levels since November.

(Reporting by Amanda Cooper, Dhara Ranasinghe and Naomi Rovnick; Editing by Hugh Lawson)