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Washington or Wyoming: What Will Drive Markets This Week?

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Washington or Wyoming: What Will Drive Markets This Week? PART 1 OF 8

How Rising Political and Geopolitical Risks Boosted Volatility

Political uncertainty rocked markets

Just as North Korea tensions were reducing and volatility was retreating from its peak, political uncertainty in the US jolted the financial markets across the globe. With equity valuations reaching new peaks, investors were searching for reasons to lock in the recent gains. Political problems in the US escalated and several members of Trump’s business councils resigned last week. This tension led to risk aversion in the markets, as investors worried that the proposed reforms from the Trump administration might not come to fruition anytime soon.

How Rising Political and Geopolitical Risks Boosted Volatility

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US market performance

The Dow Jones Industrial Average (DOD) lost 0.84% last week to close at 21,674. The other two indexes had a similar fate with the S&P 500 (SPY) shedding 0.65% and NASDAQ (QQQ) losing 0.64% in the previous week. This was the second consecutive lower weekly close for the US indexes. Bond markets (BND) fluctuated amid the rise in volatility, and the US Dollar (UUP) continued with the slide against safe-haven currencies.

VIX Index spiked by 32% in a single session

The VIX Index (VXX) started the week on a negative note after a 50% spike in the week ending August 11. These losses were quickly recovered as political uncertainty dominated the US markets. The VIX Index (UVXY) made another attempt to break 16.0 and closed the week ending August 18 at 14.26.

As per the latest Commitment of Traders (or COT) report released by the Chicago Commodity Futures Commission (or CFTC), large speculators and traders have decreased their overall net short positions to 129,406 contracts from 155,041 contracts through Tuesday, August 15. Volatility spiked after August 15, which could mean a further reduction in short positions by next week.

In the remaining parts of this series, we’ll analyze how different asset classes performed in the previous week and discuss the outlook for these asset classes.

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