US Daily Financial Risk AAR
August 8th, 2025
Day in Review
Friday's session delivered an unexpected relief rally as Trump's Russia ultimatum deadline passed without sanctions, instead yielding a surprise summit announcement with Putin scheduled for August 15 in Alaska. The S&P 500 closed up 0.78% at 6,389.45 after oscillating between 6,342 and 6,401 throughout the day, while the Nasdaq hit a new all-time high at 21,450.02. The 79% composite risk score from the morning assessment correctly identified extreme risk conditions, though the diplomatic pivot rather than economic warfare created a dramatically different outcome than the base case scenario of partial sanctions and market stress.
Overview of Observed Events
Equities: S&P 500 (^GSPC) +0.78% at 6,389.45, Nasdaq Composite (^IXIC) +0.98% at 21,450.02, Russell 2000 (^RUT) -0.42% at 2,217.88
Fixed Income: 10-year Treasury yield fell 1bp to 4.25%, 30-year yield flat at 4.89%, 2-year yield rose 2bps to 4.02%
Commodities: WTI crude (CL=F) +0.79% to $64.38, Brent crude +0.82% to $66.91, Gold (GC=F) +0.6% to $3,387.15
FX: DXY -0.08% to 98.56, EUR/USD +0.12% to 1.1588, USD/JPY -0.15% to 147.28
Volatility: VIX (^VIX) -4.4% to 15.84, well below the critical 20 threshold
Geopolitical: Trump announces Alaska summit with Putin for August 15; only implements 25% India tariff, not broad Russian oil sanctions
Equities vs. Forecast
Forecasted: High risk (0.75) with 72% probability of volatility expansion and 55% probability of S&P testing 6,200 if Russia talks failed
Actual: S&P 500 gained 0.78% to 6,389.45, Nasdaq hit all-time high, Russell 2000 underperformed at -0.42%
Why: The 7:30 PM EST summit announcement completely reversed pre-market positioning that had futures down 0.3%. Apple's $600 billion U.S. investment announcement added 87 points to the Dow and lifted tech sentiment. However, beneath the surface, breadth was terrible with only 108 new 52-week highs versus 216 new lows. Small-caps underperformed as predicted but for different reasons - not geopolitical stress but rotation out of domestic cyclicals into mega-cap tech. The morning's negative gamma flip level at 6,325 never tested as diplomatic optimism provided continuous bid support above 6,350.
Fixed Income vs. Forecast
Forecasted: Moderate-High risk (0.62) with flight-to-quality flows expected to push 10-year yields toward 4.00-4.10%
Actual: 10-year yield declined just 1bp to 4.25%, curve remained relatively flat with 2s10s at 23bps
Why: The anticipated flight-to-quality never materialized as geopolitical tensions evaporated. Bond markets had already priced in dovish Fed expectations with September cut probability at 87%, leaving little room for further rally. The $42 billion 10-year auction at 1pm ET met with tepid demand (bid-to-cover 2.31 vs 2.58 average) as dealers were caught wrong-footed expecting crisis demand. Real yields remained elevated at 2.19%, suggesting inflation concerns trumped any safe-haven bid.
Commodities vs. Forecast
Forecasted: Very High risk (0.88) with oil spike potential to $72-78 on Russian sanctions
Actual: WTI gained modestly 0.79% to $64.38, remaining near 5-week lows; Gold up 0.6% to $3,387
Why: The feared supply shock never materialized as Trump chose diplomacy over sanctions. Oil's modest gain reflected short-covering rather than fundamental demand, with traders now pricing in potential Russian supply returning to markets under a peace deal. The India tariff announcement (25% on Russian oil purchases effective August 27) was far below the threatened 100% level. Gold's muted response despite hitting $3,534 intraday reflected profit-taking and the reality that geopolitical premium was already baked into the 39% YTD gain.
FX vs. Forecast
Forecasted: High risk (0.73) with DXY targeting 100 on safe-haven flows
Actual: DXY declined 0.08% to 98.56, falling short of psychological 100 level
Why: Dollar weakness emerged as crisis premium unwound, with the summit announcement triggering immediate unwinding of long dollar positions built over the past week. EUR/USD bounced from 1.1550 support as European exposure to Russia sanctions disappeared. The yen strengthened modestly as carry trades partially unwound, though USD/JPY remained elevated at 147.28. Emerging market currencies recovered with BRL +0.9% and MXN +0.6% as systemic risk receded.
Volatility vs. Forecast
Forecasted: High risk (0.77) with VIX spike to 22-25 on deadline headlines
Actual: VIX fell 4.4% to 15.84, remaining well below 20 threshold
Why: The forecast completely missed the mark as diplomatic breakthrough eliminated tail risk. However, single-stock volatility remained elevated with Opendoor (OPEN) seeing 2 million call options traded - the third-highest daily total for any stock in 2025. The VIX/VXN spread narrowed to historical lows despite tech outperformance, signaling dangerous complacency. Put/call skew normalized to 6.1% from Thursday's 8.9%, indicating institutional hedges being unwound aggressively.
Geopolitical vs. Forecast
Forecasted: Critical risk (0.94) with high probability of sanctions cascade
Actual: Summit announcement replaced sanctions; only minor India tariff implemented
Why: The binary nature of the ultimatum resolved opposite to expectations. Witkoff's August 6 Moscow meeting apparently secured Putin's agreement to the summit, explaining why Russian markets had already begun rallying Thursday. The 25% India tariff was symbolic rather than punitive, affecting only $18 billion in annual trade versus the $780 billion that full secondary sanctions would have impacted. Markets correctly read Trump's preference for negotiation over economic warfare, with defense stocks actually declining as war premium evaporated.
Unanticipated Impacts in Unassessed Segments
Meme Stocks (OPEN): Surged +28% on massive gamma squeeze with 2 million calls traded, reminiscent of 2021 GameStop mania
European Banks (DB, UCG): Rallied +3.2% on removed Russia sanctions risk, reversing Thursday's defensive positioning
Semiconductor Equipment (ASML, AMAT): Fell -2.3% on Trump's promise of chip tariffs "within the next week"
Bitcoin: Spiked +4.1% to $91,245 as geopolitical uncertainty shifted to crypto haven
Natural Gas (UNG): Plunged -3.8% as European energy crisis fears dissipated with diplomatic progress
Airline Stocks (DAL, UAL): Jumped +2.7% on reduced oil price concerns and travel optimism
Municipal Bonds (MUB): Saw largest inflows in 6 months ($1.2B) as tax concerns trumped federal policy
Friday's session demonstrated how quickly markets can pivot from pricing catastrophe to celebrating diplomacy, though the concerning deterioration in market breadth and return of speculative excess may prove more consequential than any geopolitical resolution.