Non-farm payrolls arrive alongside the "September chill," and the market is on high alert! The VIX index surges, sounding the alarm for extreme volatility

According to the Zhitong Finance APP, as Wall Street reopens on Tuesday following the three-day holiday for "Labor Day" in the United States, these top institutions are preparing for larger-scale volatility. The Chicago Board Options Exchange Volatility Index (also known as the VIX panic index) rose over 6% on Friday and increased by more than 11% on Tuesday, highlighting that traders are beginning to bet on heightened market volatility. This comes ahead of the highly anticipated non-farm payroll data to be released on Friday, with a further surge in the VIX potentially leading U.S. stocks and even global markets into a downward trajectory of severe fluctuations. Meanwhile, market risk aversion is heating up, with safe-haven buying collectively flowing into gold.

Given that September is historically the worst-performing month for U.S. and global stock markets, coupled with increasing market concerns over Trump's potential continued threat to the Federal Reserve's independence and uncertainty surrounding U.S. President Donald Trump's tariff policies, both factors are impacting the stock and bond markets. Additionally, the abnormal volatility of the VIX has led to a decline in all three major U.S. stock indices on Tuesday, while long-term U.S. Treasury yields (10 years and above) and global long-term government bond yields, including those in Europe and Australia, have risen significantly.

Doubts about the legality of Trump's tariffs have triggered heightened market risk aversion—there are growing concerns that if Trump's tariff policies are deemed illegal, it could lead to turmoil in global trade and even severely negative diplomatic and investment relations between the U.S. and other countries. Furthermore, the budget deficit, which has been continuously rising under the Trump administration, could expand significantly, potentially leading to more extreme plan B measures to continue implementing tariffs.

Moreover, concerns over the increasingly large fiscal deficit and worries about the independence of the Federal Reserve have driven long-term U.S. Treasury yields to soar, causing market turbulence, while gold prices have risen to historic highs under the pressure of expanding global safe-haven buying.

This summer, signs of an economic slowdown in the U.S. have been accumulating, and market participants have long been worried about the valuations of the U.S. stock market and corporate bonds near their historical highs.

At the same time, the escalating disputes between Trump and the Federal Reserve have raised concerns about the potential for political pressure on the U.S. central bank, which could disrupt the U.S. Treasury market and the dollar as the global reserve currency. Although the market has seemed calm in recent weeks, economists are generally worried that the U.S. financial market may fall into prolonged chaos as a result.

Before the Non-Farm Payroll Release, the Market May Face More Severe Turbulence

On Tuesday, long-simmering anxiety showed signs of eruption, reignited by new questions about the legality of Trump's tariffs that emerged during the weekend holiday. This led to a significant drop in U.S. stock and bond prices, with many market participants expecting larger-scale market turbulence before the critical non-farm payroll report is released on Friday.

"We have some uncertainties regarding these globally oriented tariff policies, and I think that is the trigger for the current decline in risk appetite," said Seth Hickle, portfolio manager at Mindset Wealth Management "The problem is that, given we may have to return some tariff revenue overseas, this could significantly raise concerns about budget deficits, and the 'bond vigilantes' may be awakened to create some chaos in the bond market," he emphasized. Bond vigilantes typically refer to bond investors who punish poor fiscal policies by selling government debt.

The VIX panic index has recently surged, reaching its highest point in over four weeks on Tuesday, while the S&P 500 index fell 0.7% on Tuesday under the pressure of rising market volatility. In the global bond sell-off, long-term U.S. Treasury yields soared across the board.

The yield on the 10-year U.S. Treasury jumped nearly 5 basis points to 4.269% on Tuesday, while the 30-year yield soared to its highest level since mid-July, still hovering around the historical high of 5%.

Rising yields often hurt stock asset valuations when bond returns become more attractive. Investors typically view a 10-year yield of around 4.5% as a key level where demand for the stock market begins to waver. Rising yields also tend to support the dollar, which rebounded on Tuesday from recent weakness.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, stated that the surge in the 30-year U.S. Treasury yield nearing 5% "is putting some pressure on the stock market." The court ruling regarding Trump's tariffs "clearly raises concerns about how the U.S. collects tariff revenue and helps reduce our budget deficit," Luschini wrote in a report.

"September Chill" Approaches

The seasonal weakness may partly stem from investors cleaning up their portfolios upon returning from summer vacations, while also making tax and other adjustments before the year-end.

According to the Stock Trader's Almanac, September has been the worst-performing month for the S&P 500 index over the past 35 years, averaging a decline of 0.8% during this period. Of the 35 Septembers, 18 have seen declines, making it the only month in that period where the number of declines exceeds the number of gains.

Christian Hoffmann, head of fixed income and portfolio manager at Thornburg Investment Management, indicated that the market is expected to see risk aversion this month, with a large amount of debt issuance in the credit market on Tuesday exacerbating the sell-off in government bonds. "Our inclination is to gradually reduce risk during the summer as spreads continue to narrow and valuations tighten," he stated.

According to the ICE BofA corporate bond index, the corporate bond spread—the borrowing premium of high-rated companies compared to U.S. Treasuries—hit a historic low of 75 basis points last month. "Given the low volatility we are seeing and the position of spreads, a more likely scenario seems to be more severe market volatility," Hoffmann stated The non-farm payroll data for August, to be released on Friday, will be crucial for investors assessing the Federal Reserve's potential interest rate cuts in the coming months, although persistent inflationary pressures may limit its ability to extend a helping hand to Wall Street.

Investors will also be watching the confirmation hearing for Stephen Miran this week, a close ally of Trump, who has been nominated as a temporary Federal Reserve governor to replace Adriana Kugler, who resigned on August 1. His appointment comes as Trump intensifies his fierce attacks on the independence of the Federal Reserve's monetary policy, including relentless criticism of Fed Chairman Jerome Powell for not cutting rates and pushing for the removal of Governor Lisa Cook.

"The market believes that the independence of the Federal Reserve may be diminishing, which will have corresponding negative effects," said Josh Chastant, public market portfolio manager at GuideStone Funds.

Investors are also looking for alternative assets that can help protect portfolios in turbulent markets. On Tuesday, spot gold rose to a historic high of about $3,540 per ounce.

"This year, both gold and Bitcoin have risen, rather than one declining as the other rises," said Aakash Doshi, head of gold strategy at State Street Global Advisors.

The strategist noted that these two types of safe-haven assets—one traditionally viewed as a risk-hedging tool and the other seen as a high-volatility new hedging strategy—have particularly aligned with gold when it comes to dollar logic. "Moreover, both provide alternatives to fiat currency and have de-dollarization properties."

VIX Soars to One-Month High as Investors Focus on Tariff Policies and Prepare for Volatile Non-Farm Data

During Tuesday's trading session, as Wall Street faced a new wave of uncertainty related to trade policies and upcoming U.S. economic data, market tensions resurfaced. Volatility surged, with the VIX index jumping 15.5% in early trading, reaching an intraday high of 18.65—the highest level since August 5—before ultimately closing up over 11%.

The spike in the VIX index highlights the surge in market volatility, reflecting investor anxiety during the recalibration process following a ruling by a U.S. appeals court on Friday night that overturned most of the tariffs imposed by former President Donald Trump.

The judge ruled that the Trump administration overstepped its authority in invoking emergency powers to reshape trade policy, a decision that could reshape the trajectory of future U.S. trade negotiations and potentially exacerbate market fears regarding the budget deficit.

The three major U.S. stock indices have recently been hitting historical highs; however, on Tuesday, they turned lower as traders weighed the court's ruling on tariffs against broader macro risks.

Market attention has now shifted to the highly anticipated non-farm payroll report on Friday, which could provide new signals regarding the strength of the labor market and guide market expectations for the Federal Reserve's monetary policy in the coming months.

Current interest rate futures traders are betting that the Federal Reserve will cut rates by 25 basis points in September, with the CME FedWatch Tool showing a 90% probability of a 25 basis point cut in September. However, the non-farm data to be released on Friday could determine whether the market further prices in a potential 50 basis point cut by the Federal Reserve in September to initiate a new round of rate cuts Economists currently expect that non-farm payrolls will increase by less than 100,000 for four consecutive months, with an anticipated increase of only 75,000 jobs in August, marking the weakest employment data since 2020; the unemployment rate is also expected to rise slightly in August.

Goldman Sachs' strategist team stated that Federal Reserve Chairman Jerome Powell has signaled a green light for a rate cut in September, but the August non-farm payroll data will be a key factor in determining the magnitude and pace of the rate cut. If job growth is below 100,000, it will help confirm a rate cut in September. Powell's remarks at the Jackson Hole central bank annual meeting, particularly his reiteration of "downside risks to the labor market," can be seen as paving the way for the Federal Reserve to shift towards rate cuts, echoing his heightened concern for the U.S. labor market during the press conference following the last Federal Open Market Committee (FOMC) monetary policy meeting