By Amanda Cooper and Dhara Ranasinghe

LONDON (Reuters) -Global markets have been sucked into a downdraft after U.S. President Donald Trump's sweeping tariffs, setting investors' go-to warning lights flickering but not yet flashing red.

S&P 500 companies have shed $5 trillion in stock market value, an all-time two-day plunge for the benchmark, surpassing a two-day loss of $3.3 trillion in March 2020, when the pandemic ripped across global markets.

So far, indicators of market stress reflect the nervousness that high volatility brings, but no signs yet of full-on panic.

VIX ON THE MOVE

Wall Street's closely-watched fear gauge, the VIX volatility index, closed at a five-year high on Friday, a sign of elevated anxiety.

But even after this week's spike, the VIX - at around 40 points - remains well below levels seen during the COVID crisis and in 2008.

The MOVE bond index, the benchmark for rate volatility, advanced to 125.71 on Friday, the highest since the November presidential election. That level reflected expectations Treasury yields across most maturities will move an average of 8 basis points (bps) per day in either direction over the next 30 days.

BONDS SHINE

One classic indicator of market stress is investors piling into safe-haven government bonds and so Friday's fall in U.S. two-year Treasury yields, which at one point dropped 20 bps, and the 15 bps fall in German Bund yields are notable.

Over the last two days, two-year Treasury yields have fallen 26 bps, their biggest two-day move since August.

Treasuries gave up some gains on Friday, pushing yields off their lowest levels.

Still, analysts said the world's biggest government bond markets appeared to be functioning well.

"There are no concerns right now on that front (trading conditions), it's all very orderly. There’s no stress in that sense," said PIMCO fund manager Konstantin Veit.

BANKS WOBBLE

Japanese megabanks ended the week with the biggest losses since 2008 in one of the markets' most unsettling signals so far about the consequences of Trump's trade war.

European and U.S. banks slumped over 8% and 7% respectively on Friday and the cost of protecting against bank defaults has risen.

"Sentiment is driving bank equities down, there’s profit taking, there's worries about global growth," said Altaf Kassam, Europe head of investment strategy and research, State Street Global Advisors. "But it doesn't feel like a genuine credit or liquidity crunch right now."

CROSS-CURRENCY BASIS SWAPS

These derivatives measure non-U.S. investor demand for the dollar, which is often the safe haven of choice in times of turmoil. This dynamic is not playing out at all right now, as investors shun the dollar and snap up the yen and the Swiss franc.

Spreads for the euro have narrowed this week, to around 4.25%, from closer to 8% last week, but this is roughly where the spread was in mid-March. Spreads for the yen and the pound are often heavily influenced at this time of year by fiscal year-end currency flows and have shown similar stability.

SWAP SPREADS

One measure of strain in the bond market is swap spreads, which capture the premium on the fixed side of an interest-rate swap, which investors use to hedge against rates risk relative to bond yields.

The pressure building in the U.S. bond market is starting to become apparent. U.S. two-year swap spreads - the difference between two-year swap rates and the two-year Treasury yield dropped to -22 basis points, that's the tightest since November . Tighter spreads meant the gap between Treasuries and swaps is more negative.

Two-year notes dropped as much as 26 bps on Friday to 3.465%, the lowest since September 2022.

In times of market panic, long-term investors tend to hedge their exposure in the swaps market to position for lower interest rates in a sign of concern over the sharp sell-off in stocks.

European swaps were more muted. The two-year spread hit its widest since October 2024, at some 20 basis points, but held below the 75 bps seen in the March 2023 crisis.

JUNK BOND SPREADS

U.S. and European junk bond spreads, which reflect the premium investors get for betting on risky debt, rather than government bonds, have blown out to multi-month highs.

These risky assets, which typically outperform other assets when confidence is running high, are often the first assets investors ditch when trouble appears.

The iTRAXX Crossover Index an index of five-year European junk bonds hit 380 bps on Friday, the most since November 2023, its biggest two-day jump since March that year.

For comparison, it hit 500 in 2020 and topped 1,000 at one point in 2008. The ICE BofA U.S. High Yield Index is heading for its largest weekly rise since January 2024 for an effective yield of 8.1%, again, well below 2008's 22%.