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Trade War Fears Could Ignite Volatility This Week

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Stock market volatility reignited with US tariffs

One of global investment professionals’ biggest concerns for many months unfolded last week. President Trump proposed tariffs on steel and aluminum imports. Just as global markets were recovering from the severe correction at the beginning of February, President Trump’s tariffs and his supporting tweets could reignite volatility in the markets. Tariffs are considered to be negative for global economic growth. As a result, there was a negative shock in the markets last week. The other major factor impacting volatility this week is the Italian elections. A hung parliament is threatening to derail the Eurozone’s economic recovery and stability.

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US market performance

Equity markets in the US returned to weakness in the first week of the month. Broad market ETFs like the SPDR S&P 500 (SPY), Deutsche Bank’s Dogs of the Dow ETN (DOD), and the PowerShares QQQ Trust Series (QQQ) all registered losses for the week ending March 2. US bond (BND) markets were choppy. Bond markets were impacted by hawkish comments from Fed Chair Jerome Powell. The US dollar managed minor gains as risk aversion took center stage.

Another volatility spike

The CBOE Volatility Index (or VIX) is a measure of investors’ expectations for future volatility. VIX, which is tracked by ETFs like the iPath S&P 500 VIX short-term futures (VXX), bounced back last week. The S&P VIX 500 closed at 19.59—compared to the previous week’s close of 16.49. According to the latest Commitment of Traders report released by the Commodity Futures Trading Commission, large speculators, including hedge funds, reduced their long volatility contracts from 59,550 contracts to 34,383 contracts. The data were recorded before the news about the tariffs. Volatility could increase as risk aversion escalates this week.

In this series, we’ll analyze how various asset classes performed and discuss their outlook.

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