Markets in Motion: Volatility with Perspective

It’s been a topsy-turvy week for markets. After a long stretch of relative calm, this week saw the highest volatility since April. Headlines swung from renewed trade tensions between the US and China to strong earnings from major banks, followed by renewed jitters around US regional lenders. Whilst this has created short-term noise, the recent swings mark more of a return to normal market conditions and volatility, rather than necessarily signal a cause for concern.

US-China Trade Tensions Resurface

Last Friday saw President Trump kick off another round of tariff threats, announcing plans to impose 100% tariffs on all Chinese imports next month. The move came in retaliation to China’s new restrictions on rare earth exports – critical materials for many modern technologies.

The reaction was stronger than Trump’s previous tariff threats. Markets sold off sharply on Friday, though over the weekend the rhetoric softened, and investors reassessed the likelihood of an actual escalation. By Tuesday, equities had recovered about half of their earlier losses, and trading turned choppy rather than outright negative.

China responded by sanctioning US divisions of a South Korean shipping company and signalling that further measures could follow. The back-and-forth kept investors on edge, pushing the dollar slightly higher while weighing on oil prices. Yet, by midweek, it was clear markets were treating the trade headlines as another episode of political noise rather than a structural shift in the global outlook.

Strong Bank Earnings Signal Resilience

Midweek attention turned to corporate earnings and the tone brightened. Large US banks delivered stronger-than-expected third-quarter results, buoyed by active dealmaking, robust trading revenues, and continued strength in asset management.

JPMorgan, Morgan Stanley and Goldman Sachs among others all exceeded profit expectations, with profit growth ranging from +12% to over +40% year-on-year. Beyond headline profits, growth was also evident in customer activity and market-driven revenues. Spending on debit and credit cards, auto loan originations, and client assets in wealth management all increased, while investment banking and trading revenues posted record gains.

Regional Banks Weigh on Markets

By Thursday, sentiment turned once again as US regional banks came under scrutiny. Zions Bancorp (“Zions”) and Western Alliance both reported losses related to fraudulent loans made to commercial real estate funds that were already under financial strain. In these cases, the borrowers misrepresented key information, resulting in the banks extending credit that ultimately could not be recovered. The disclosures have drawn investor attention to the strength of internal controls, underwriting standards, and overall asset quality across regional banks.

While the direct financial impact was limited, the reaction from investors was sharp. Shares of 74 major US banks collectively lost over $100 billion in market value. The sell-off extended into Friday, pulling global equity markets lower and pushing the VIX – a key gauge of short-term volatility – to its highest level since April (discussed further below).

However, it’s important to bear in mind that Zions and Western Alliance are relatively small players, and any exposure in portfolios to similar regional banks is modest. While it’s still helpful to follow developments at these smaller banks, the earnings and insights from the large banks dominate the market and offer greater insight on the overall credit environment.

A Return to Normal Volatility

The graph below shows the Volatility Index (VIX). Aside from the period around “Liberation Day”, markets have been unusually calm, with the VIX hovering near multi-year lows. This week, we’ve seen volatility pick up noticeably compared with what we’ve become accustomed to. However, these recent movements are more a return to normal levels rather than a major red flag. As investors digest changing narratives around trade, earnings, and credit, day-to-day market swings are to be expected. For long-term investors, these fluctuations are simply part of the normal market rhythm.