Cockroach fears cause stock market sell off, as we wait for clearer details

It’s a volatile end to the week, stocks are a sea of red in Europe and Asia, and US equity market futures are pointing to another day of hefty losses for stock indices across the pond.  The selloff has been caused by fears about the private credit market. What started as concerns about two bankrupt companies, First Brands and Tricolor, and the impact on private lenders, has now broadened out to concerns about US regional banks after Zions Bancorp and Western Alliance both said that they would suffer losses due to fraudulent loans.

Credit bubble fears dominate

Fears are rising that the rush into credit in the last 2 years will lead to a wave of bad loans and write-downs, which could affect the banking sector, similar to what happened with Silicon Valley Bank in 2023. Combined with fears about a trade war between the US and China, risk is being taken off the table as we end the week.

Jaime Dimon, CEO of JP Morgan, said on Tuesday that when you find one cockroach (ie, one bad loan), then you often find more. This has spooked financial markets, who have been jittery in recent days. For now, the sell off in European indices is not a rout, the Eurostoxx 50 index is down 1.4% and the FTSE 100 is lower by 1.5%. This is a shakeout, but  it may not be the end of the uptrend.

S&P 500: watch the 50-day sma

We will be closely watching to see how the S&P 500 performs later today since the US blue chip index remains above the 50-day sma at 6,557. A weekly close below this level would be bad for risk sentiment and would suggest a loss of short term upward momentum, which would jeopardize the integrity of the current uptrend, and it may signal a deeper sell off down the line. Alternatively, if we get a close above this level, then it would reaffirm the strength of the uptrend and investors desire to buy the dip.

Chart 1: S&P 500

Source: XTB and Bloomberg

Global bank stock sell off a sign of animal spirits

Financials are weighing on both the Eurostoxx index and the FTSE 100 index today. This suggests that global bank stocks are getting sold indiscriminately, since the problems are 1, mostly in the private credit markets and 2, primarily in the US for now. The issue is that the private credit market is not transparent, this is breeding fear, which could lead to stock markets overshooting on the downside.

Stock market sell off not yet at the ‘yippy’ phase

When Jamie Dimon speaks, the market should listen. Essentially his concerns suggest that there are pockets of weakness in the credit markets, and after a credit binge, now comes the period of indigestion. This does not mean that we are having another financial crisis, and this is why the stock market sell off is not yet at the ‘yippy’ stage, to borrow from Donald Trump.

Safe havens rally

There has been a broad push into safe havens, the yen and the Swiss franc are the top performers in the G10 FX space on Friday, sovereign bonds are rising and yields are falling across the US and Europe. The gold price pushed above $4,300 earlier to a fresh record high. The near parabolic rise in the gold price in recent months is now making more sense, as fears of a credit market bubble arise.

AI stocks sell off, but not because of bubble fears

Looking ahead, tech stocks are sharply lower in the pre-market. Ironically enough, after much speculation that stock markets could tumble on the back of an AI bubble, it’s the bankruptcy of an auto parts business, the most value-like business you can imagine, that has triggered fears about a bad loan crisis. Tech stocks are likely to come under heavy selling pressure for as long as this shake out continues, because they make up such a large portion of the S&P 500, not because they are in trouble per se.

Ahead today, the concerns brewing about bad loans in the US financial system, means that the slew of US regional bank earnings that will be released later today, could determine market sentiment. Any more nasty surprises about fraudulent loans or write offs could spook the market further and lead to another leg lower in this sell off. The Vix has jumped to its highest level since April and is rising sharply, it is above 27, suggesting that markets remain jittery and are likely to react to news flow, with the path of least resistance now being further downside for risk.

Chart 2: Vix index

Source: XTB and Bloomberg

Oil price sinks on Ukraine/ Russia news

Energy stocks are also weighing on the FTSE 100 this Friday, as the oil price tumbles on news that President Trump is trying to negotiate the end to the war in Ukraine. Brent and WTI crude are both lower by more than 1% today, and Brent crude is hovering just above $60 a barrel, a key psychological level. The price is at the lows of the day. Trump’s last meeting with Putin in August did not result in an end to the war, if this new meeting can get Russia and Ukraine on the path to peace then there could be more downside for the oil price. BP is lower by 3% today as its pivot back to oil earlier this year, once lauded by shareholders, leaves the company exposed to a weaker oil price if a peace deal is reached.