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How Political Uncertainty Could Drive Markets This Week

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Aug. 18 2020, Updated 5:26 a.m. ET

Political uncertainty back in focus

Global markets mostly fell last week (ended May 25) as political uncertainty kept investors at bay. Donald Trump calling off the North Korea summit and later saying that the summit could still happen, political disturbances in Spain and Italy, and volatile crude oil prices all dragged down equity indexes. US indexes (VOO), however, showed a reduction in concerns about higher rates after the Fed indicated at its May meeting that it is alright with inflation overshooting its 2% target in the short term.

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US market performance

All major US indexes managed to close last week positively, helped by reduced concerns about a fourth rate hike this year. The S&P 500 (SPY) rose 0.31%, Deutsche Bank’s Dogs of the Dow ETN (DOD) rose 0.15%, and the PowerShares QQQ Trust Series 1 (QQQ), which tracks the NASDAQ, rose 1.1%.

VIX index down as earnings eliminate volatility

The VIX, a measure of investor expectations for future volatility tracked by ETFs such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX), fell 1.5% last week and closed at 13.2. However, this position will likely change given the cancellation of the US-North Korea summit and increased political uncertainty in Europe.

According to the Commodity Futures Trading Commission’s latest Commitment of Traders report, large speculators such as hedge funds increased their net short volatility positions by 21,321 contracts, from 3,732 contracts to 25,556. In the next part of this series, we’ll discuss how speculators’ S&P 500 positions changed last week.

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