Yep, loyalty cascade.
This term denotes a phenomenon that you've run afoul of. When a creature kills a member of a civilization, it becomes an enemy of that civilization. It will then attempt to kill any further members of that civilization it encounters, and any members of that civilization that encounter it will attempt to kill it. Dwarven caravan merchants are members of your dwarf civilization, as are all of your dwarves, so now that axe lord is an enemy of the State.
What's worse is that everything I just mentioned is also true for groups (basically, sub-sections of a civilization). That axe lord, despite being an enemy of the civilization, is still a member of your fort's group, so if anyone else kills him, they'll become an enemy of your group, so all of your other citizens will attempt to kill/be killed by them. And since the original axe lord's killer is still a member of the civilization at large, anyone who kills them will become an enemy of the civilization, and thus will attempt to kill/be killed by all of the members of your civilization (i.e. everyone else in your fort).
So basically, unless you can kill your newly-psychotic axe lord through some means that doesn't involve any other dwarf getting the kill, you'll just have a full-on civil war until all of your dwarves are dead or divided into 2 camps, one composed of enemies of the civilization members of the group, the other composed of enemies of the group members of the civilization, and any dwarf (such as migrants) will be attacked by both, and if they manage to survive the attack they'll be inducted into the ranks of the group that didn't attack them.