By Martin Baccardax

Confidence that "Trump always chickens out" appears to have outweighed fear that the credit markets are swarming with undisclosed problems, steadying stocks.

President Donald Trump's suggestion of a trade truce between Washington and Beijing, and his openness to meeting with Chinese President Xi Jinping later this month, appears to have soothed investor concerns over weakness in private credit markets and the regional banking sector.

In some respects, that does make sense. Zions Bancorp, a regional lender with a market capitalization of nearly $8 billion, disclosing a loss of $50 million shouldn't lop $100 billion in value from the U.S. banking sector, as it did on Thursday.

But timing is everything. And when news of the loss comes amid a flurry of concerns tied to the opaque world of private credit, worries over a bubble in artificial intelligence stocks, and a federal government shutdown with no end in sight, the stakes suddenly seem a little higher.

A lawsuit filed by Western Alliance alleging fraud by one of its clients, plus concerns over collateral from two others, make the picture more unsettling.

Both arrived less than a day after JP Morgan Chase CEO Jamie Dimon, Wall Street's voice of vigilance, warned of "cockroaches" in the banking system following the bankruptcies of First Brands and Tricolor.

"Investors are concerned that banks are either not doing proper diligence or are far enough removed from the collateral that appropriate monitoring isn't taking place," said Bill Bebel, senior managing director at 22V Research. "While we're not anticipating broad credit problems from here, it's clear that there is very little tolerance for headline risk in the near term."

All of this happened during a week in which markets would normally have digested data on inflation, retail sales, and weekly claims for unemployment benefits that would help investors calibrate their bets on the Federal Reserve's next move on interest rates. Those data releases, of course, were delayed by the federal government shutdown, which looks set to extend into the end of the month and possibly beyond.

What the market has been doing in a vacuum of economic data releases, an intensifying trade war, and stock index gains tied to a handful of shares should have surprised no one.

The Cboe Group's VIX index, the market's benchmark volatility gauge, has surged more than 30% over the past five days to trade at around 23.4. It was most recently in that zone during the "Liberation Day" tariff turmoil of early April.

Benchmark 10-year Treasury notes also rallied, sending the yield on the debt more than 0.2 percentage-point lower over the past 10 days to 3.955%, the lowest since early spring. The paper was last seen trading at 4.015%.

And gold, of course, is extending its record run.

But stocks are starting to recover. The S&P 500 was 8 points higher on the session in late morning, following solid third quarter results from Truist Financial, Regions Financial and Fifth Bancorp.

The mood remains cautious, but the worst of the premarket declines have been erased.

"Investors are now looking ahead to the weekend, worried if there may be further bad loan revelations," David Morrison, senior market analyst at Trade Nation, said of the credit-market concerns.

"But it's also worth considering that the banking selloff may be overdone," he added. "It's possible that these are all isolated incidents which are completely unconnected, other than the timing of the banks fessing up to them."

That could leave cooler heads to prevail. The first of the megacap tech earnings arrive next week. A good set of numbers from Wall Street's biggest banks over the past few days suggests another quarter of collective double-digit profit growth for the S&P 500.

If regional banks really turn out to be wobbling, the Fed is likely to put aside some of its broader inflation concerns and deliver another half percentage-point of interest-rate cuts between now and the end of the year. And the economy, while slowing, remains far from recession.

The bull case remains sound, but that doesn't mean markets will avoid a bit of short-term fury.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 17, 2025 11:03 ET (15:03 GMT)

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