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Why Volatility Could Rise Quickly This Week



US-China trade negotiations see some light

US equity indexes finished the week that ended on May 18 on a negative note despite reports indicating that US-China trade negotiations had resulted in China agreeing to reduce its trade surplus with the United States by $200 billion.

In a joint statement released on May 19, the United States and China revealed that China would increase its imports of US products and that both sides would work to resolve their economic and trade concerns.

Volatility in the equity markets (VOO) in the week, however, was influenced by higher bond yields and an appreciating US dollar, which were pushed higher by the increased economic divergence between the United States and other developed economies.

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US market performance

All major US indexes had a negative close in the week that ended on May 18. The S&P 500 Index (SPY) fell 0.23% in the week. The Deutsche Bank Dogs of the Dow ETN (DOD) fell 0.74% in the week, and the PowerShares QQQ Trust, Series 1 ETF (QQQ), which tracks the NASDAQ, fell 0.77% as higher yields started to have an impact on indexes.

VIX down as earnings eliminate volatility

The CBOE Volatility Index (or VIX), which is a measure of investors’ expectations for future volatility and is tracked by ETFs such as the iPath S&P 500 VIX Short-Term Futures ETF (VXX), rose 6.1% in the week that ended on May 18 and closed at 13.42.

Volatility has been trending lower than its multiyear peak as risks from trade wars and geopolitical issues seem to be off the table for now. Investors in volatility futures contracts have moved into net short positions for the first time in 14 weeks.

As per the latest Commitments of Traders report released by the Commodity Futures Trading Commission on May 18, large speculators, including hedge funds, have decreased their long volatility positions by 24,321 contracts from 17,589 long contracts to 3,732 short contracts.


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