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White House Drama and FOMC Could Push Volatility Higher This Week

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Stock markets brace for higher volatility

White House drama dominated US market movement last week. After Trump fired US secretary of state Rex Tillerson via Twitter, President Trump fired FBI deputy director Andrew McCabe days before his retirement to undercut Robert Mueller’s probe into Russia meddling in the US elections. If we put political risk aside, markets were still on the edge last week due to the possibility of a second round of tariffs. Economic data reported last week indicated slower growth in inflation, but higher industrial production and consumer confidence overshadowed the weak inflation report.

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US market performance

Equity markets in the US remained under pressure amid increased political uncertainty and the possibility of another round of tariffs. Broad market ETFs like the SPDR S&P 500 (SPY), the Deutsche Bank’s Dogs of the Dow ETN (DOD), and the PowerShares QQQ Trust Series (QQQ) fell in the previous week. The US dollar rallied against major currencies after the industrial production and consumer confidence reports, while the US bond (BND) markets managed a minor recovery as lower-than-expected February inflation growth reduced fears about faster rate hikes.

VIX Index speculators continue to bet against volatility

The CBOE Volatility Index (or VIX), which is a measure of investor expectations for future volatility and tracked by ETFs such as the iPath S&P 500 VIX short-term futures (VXX), rebounded last week. The S&P VIX 500 closed at 15.8 as compared to the previous week’s close of 14.64. As per the latest Commitment of Trader’s (or COT) report released by the Commodity Futures Trading Commission (or CFTC), large speculators have decreased their long volatility positions from 76,918 contracts to 53,612 contracts. With the FOMC March meeting in focus and the ongoing political drama in the White House, we can expect bouts of higher volatility this week.

In the rest of this series, we’ll analyze the performance of various asset classes and discuss their outlook for the week ahead.

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