"The most turbulent week since April has ended, with the US stock market still rising but no longer calm."

"Most volatile week since April" has come to an end, and the long-lasting calm in the market is unraveling. This week, with the reignition of trade conflicts, the emergence of credit risk in US regional banks, and concerns about overvaluation of AI stocks, jointly triggered the most intense market turmoil in the US stock market since April. The intraday gain of the S&P 500 index has exceeded 2% for the first time since April. Although on Friday, the three major US stock indexes opened lower and then rebounded, they still accumulated an increase of at least 1% over the week. However, investors flooded into safe-haven assets such as Treasury bonds and gold, high-yield bond funds experienced large-scale outflows, and risk trades such as cryptocurrencies, which were once hot, lost momentum. Various signs indicate that the market sentiment is undergoing a shift. Although not everyone sees this as the beginning of a bear market, the subtle change in investor sentiment, the reassessment of credit risk, and the cooling off of speculative trades are prompting large money managers to adopt a more cautious and defensive stance. After experiencing months of one-way growth, the market is now learning to coexist with volatility again. Trillion-dollar risk accumulation warns The stock market still closed with a good increase this week, as the US stock market continued a bull market that has accumulated a total market value of $28 trillion since Trump withdrew from tariff threats. However, the continuous six-day volatility across asset categories indicates a deeper anxiety spreading: credit vulnerability. The collapse of the automotive supplier First Brands Group and the automotive loan institution Tricolor Holdings reignited long-dormant concerns about credit losses. It was reported by the media that on Thursday last week, advisors of First Brands admitted in court that they could not trace $1.9 billion in assets that should have been collateral for creditors, and the company's bank account had only $12 million left. This week, reports from Wall Street Journal mentioned that fraud-related impairment losses disclosed by Zions Bancorp and Western Alliance wiped out more than $100 billion in US bank stocks in a single day, sparking more widespread concerns about loan pressures. These events directly impacted the relevant sectors. The S&P Regional Bank Index fell for the fourth consecutive week. Previously boosted by the AI frenzy and resilient consumer data, investors seemed unfazed by all risks, including government shutdowns and overvaluations, which led to what appeared to be aggressive positions. According to data from French bank Industrial Bank, by the end of August, the allocation of risk assets such as stocks and credit in tracked portfolios had risen to 67%, nearing peak levels. Safe-haven sentiment prevails, VIX index surges One of the most significant features this week is the sharp return of market volatility. The VIX index, which measures market fear, rose to 28.99 at one point, reaching the highest intraday level since late April. The VVIX index, which tracks the speed of investor sentiment changes, also hit a high since April. This indicates that behind the seemingly robust stock indices, the market's underlying stability is weakening. At the same time, according to CME Group's global market data, investors are buying options betting that the VIX index could surge to 47.5 and 50, with an indicator of hedging against tail risks hitting a six-month high. Jordan Rizzuto, Chief Investment Officer at GammaRoad Capital, said: The list of concerns is actually increasing, and in this environment, we should expect higher volatility. High-risk assets recede, cryptocurrencies take the brunt As risk aversion heats up, previously popular high-risk assets are retreating. The cryptocurrency market has become a hard-hit area, with Bitcoin dropping to its lowest point since July on Friday, down about 8.7% for the week, marking its worst weekly performance since February. Of note, unlike in the past when there were always retail investors "buying the dip" after a crash, this time the market reaction has been tepid, indicating "enthusiasm is waning, and risk control awareness is increasing." This cooling trend may not be limited to the token field. According to EPFR Global data, in the week ending Wednesday, over $3 billion have flowed out of high-yield bond funds. While the spread of high-yield corporate bonds remains at historic lows, it has widened by 0.25 percentage points to 2.92 percentage points this month. In quantitative investment portfolios, strategies to avoid credit risk are gaining favor again. According to Evercore ISI, a hedge trade that involves shorting highly leveraged companies while going long on low-leverage counterparts has brought in strong returns again, echoing the pattern seen before the peak of the dot-com bubble. Fund managers adjust their strategies towards credit risk defense John Roe, head of the Legal & General multi-asset fund managing $1.5 trillion, stated that his team has decided to reduce risk exposure and went short on stocks on Wednesday, as they saw a growing disconnect between investor positions and fundamentals. He added that the company had already underweighted credit assets, viewing the collapse of Tricolor and First Brands as potential warning signals of broader pressures, especially among low-income borrowers. Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, expressed similar views. He said: I believe we are entering a typical credit downturn cycle, which is not catastrophic but signals increasing risks for a broader environment. In the past two weeks, he increased his stock hedging, reduced the stock exposure by about 10 percentage points, and sold bullish options on the S&P 500 index to protect the strong gains since the beginning of the year. Not everyone sees a turning point in the market Despite rising concerns, not everyone believes that the market has reached a decisive turning point. Some analysts believe that the recent volatility is more of an overreaction to isolated events in the market, rather than a signal of systemic issues. Garrett Melson, portfolio strategist at Natixis, stated that the sell-off related to Zions and Western Alliance may reflect market positioning and sentiment rather than deep-seated credit pressure. He believes that: The fundamentals of the credit market are still strong, and our team has recently adjusted our stock exposure from slightly underweight to neutral. Matt Wittmer, portfolio manager at Allspring Global Investments, also views the recent volatility as "healthy" after a rapid and significant market increase, indicating that the market is not "too extended." His company continues to be overweight on financial stocks such as JPMorgan Chase and Citigroup, and maintained its positions amidst the recent intense market fluctuations. This article is excerpted from "Wall Street News," written by Yi Long Bao; GMTEight Editor: Yu-Cheng He.