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Why Tax Bill Uncertainty Left Volatility Elevated

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Volatility remained elevated as tax cuts remain uncertain

Uncertainty rocked markets across the globe last week. Two major triggers for last week’s slide were the softer-than-expected industrial production data in China and the continuing uncertainty about US tax reforms. Weak Chinese industrial growth is considered a sign of slowing global demand, and lower October retail sales growth in the US added to the downward pressure on the indexes. Last week, the House passed the US tax reform bill with the 20% corporate tax cut in place. The US Senate will be at the center of attention as the tax reform bill is discussed this week. It could take many weeks for the House and Senate to reach common ground, which means volatility will likely stay elevated.

US market performance

US markets were dragged lower by global slowdown concerns and lower energy prices. The S&P 500 Index (SPY) fell 0.13% in the week ending November 17. The Dow Jones Industrial Average (DOD) lost 0.27% and the tech-heavy NASDAQ (QQQ) was the only positive index, posting gains of 0.47% in the previous week.

The US bond market (BND) was marred with concerns about a flattening yield curve as the ten-year yields dropped lower last week. The US dollar (UUP) depreciated against the major currencies as tax reform uncertainty and weaker-than-expected retail sales growth disappointed investors.

VIX index speculators continue to bet against volatility

The volatility index, VIX (VXX), remained supported as uncertainty about the US tax reforms and sliding oil prices impacted markets. The S&P VIX 500 closed at 11.4, appreciating by 1.2% in the previous week. As per the latest commitment of trader’s report, released by the Commodity Futures Trading Commission (or CFTC), large speculators have decreased their overall net short positions from 153,309 to 127,658 contracts in the previous week.

Volatility could be elevated but the market trading volume could drop going into the Thanksgiving holiday. The German political uncertainty after the failure of coalition government formation talks could add another dimension to the sources of volatility this week. In the remaining parts of this series, we’ll discuss the outlook for different asset classes this week.

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