US Daily Financial Risk AAR
August 12th, 2025
Day in Review
Tuesday's trading session delivered a powerful risk-on rally that dramatically exceeded cautious pre-market expectations, as July CPI data at 2.7% YoY came in below the 2.8% consensus, unleashing broad-based buying that pushed both the S&P 500 and Nasdaq to fresh record highs. The anticipated volatility from the 73.9% composite risk score failed to materialize as markets instead embraced a goldilocks narrative, with the S&P 500 surging 1.13% to close at 6,445.76, far surpassing the tepid +0.18% futures indication and breaking decisively above the critical 6,400 psychological level.
Overview of Observed Events
Equities: S&P 500 (^GSPC) closed +1.13% at 6,445.76, Nasdaq Composite (^IXIC) +1.39% at 21,681.90, Dow Jones +1.10% at 44,458.61, Russell 2000 +2.93% at 2,291.57
Fixed Income: 10-year Treasury yield rose to 4.316% (+4.3bps), 30-year yield jumped to 4.901% (+6.0bps), 2-year yield fell to 3.75% (-2bps)
Commodities: WTI crude flat at $63.96, Brent crude +0.27% at $66.77, Gold +0.27% to $3,352.12/oz, Natural Gas -5.60% to $2.79
FX: DXY -0.55% to 97.98, EUR/USD -0.07% to 1.1610, USD/JPY +0.23% to 148.44, GBP/USD +0.22% to 1.3460
Volatility: VIX ranged 15.98-17.57, declining through the session from opening levels around 17
Geopolitical: Trump extended China tariff deadline by 90 days; signaled openness to Nvidia chip sales to China
Equities vs. Forecast
Forecasted: High risk (0.74) with potential 2-4% intraday swings, gamma positioning flip below 6,350, breadth deterioration, tech vulnerability
Actual: Markets delivered strong upside with S&P 500 gaining 1.13% to record highs; Russell 2000 surged nearly 3% leading all indices
Why: The CPI data coming in below consensus at 2.7% YoY triggered massive short covering and systematic buying above the 6,350 gamma flip level, turning negative gamma positioning into an accelerant for the upside rather than downside. The breadth concerns evaporated as advancing issues overwhelmed decliners by 4:1, while small-caps' 2.93% surge reflected aggressive rate cut positioning. CTAs' $92 billion selling pressure never materialized as momentum signals flipped positive intraday, creating a feedback loop of buying.
Fixed Income vs. Forecast
Forecasted: Moderate-High risk (0.61) with 15-25bp yield volatility, curve bear-steepening risk, MBS convexity hedging flows
Actual: Yields rose modestly with 10-year up 4.3bps to 4.316%, 30-year up 6bps; curve maintained normal slope with limited volatility
Why: The anticipated volatility was muted as the CPI print created a goldilocks scenario where inflation was cooling but not collapsing. The 3-year auction at 1pm ET was well-received contrary to supply concerns, with indirect bidders taking 71% versus 65% average. The rise in longer-dated yields reflected not risk-off positioning but rather reduced recession fears, with the 2s10s spread widening to 57bps as growth optimism returned.
Commodities vs. Forecast
Forecasted: High risk (0.72) with oil spike potential to $75-85 on sanctions, gold testing $3,400, agricultural inflation from trade disruption
Actual: Energy markets were subdued with WTI flat and Brent up marginally; gold rose modestly to $3,352; natural gas plunged 5.6%
Why: The feared Russian sanctions implementation never materialized, removing the $10-15/barrel geopolitical premium from oil prices. OPEC+ production increases of 548k bpd exceeded expectations, capping any upside. Gold's failure to test $3,400 reflected profit-taking and reduced safe-haven demand as equity markets rallied. The API inventory data showed a larger-than-expected 5.2mm barrel build versus the 2.8mm forecast, further pressuring energy.
FX vs. Forecast
Forecasted: Moderate-High risk (0.67) with DXY testing 100, EUR weakness to 1.14, yen intervention above 148
Actual: Dollar weakened significantly with DXY falling 0.55% to 97.98; EUR/USD held above 1.16; USD/JPY rose but stayed below 149
Why: The dollar's anticipated strength completely reversed as the CPI data increased Fed cut probability to 94%, narrowing rate differentials. The DXY broke below 98 support rather than testing 100 resistance as positioning unwound. EUR/USD's resilience above 1.16 reflected ECB hawkishness maintaining rate support. Japanese authorities held fire on intervention despite USD/JPY at 148.44, preferring verbal warnings.
Volatility vs. Forecast
Forecasted: High risk (0.71) with VIX spike to 20-24 on CPI miss, dispersion trades, 0DTE options creating intraday whipsaws
Actual: VIX declined throughout the session, trading in a 15.98-17.57 range, well below the predicted spike levels
Why: The binary event risk from CPI evaporated as the data hit the sweet spot for markets, crushing implied volatility. The anticipated gamma squeeze never occurred as dealers remained long gamma above 6,350, dampening rather than amplifying moves. Single stock volatility compressed alongside index vol as correlation declined, invalidating dispersion trade setups. 0DTE volume remained elevated but created stability through constant delta hedging rather than whipsaws.
Geopolitical vs. Forecast
Forecasted: Critical risk (0.92) with Russia summit failure, secondary sanctions cascade, Middle East escalation, China retaliation potential
Actual: Markets largely ignored geopolitical risks as Trump extended China tariff deadline 90 days and signaled flexibility on tech exports
Why: The anticipated geopolitical catalysts transformed into positive developments with Trump's surprise 90-day extension removing immediate tariff cliff risks. The feared escalation ahead of Friday's Putin summit was replaced by diplomatic optimism. The Nvidia Blackwell chip compromise eliminated a major US-China flashpoint. Markets interpreted these moves as reducing tail risks rather than escalating tensions, allowing focus to shift entirely to supportive monetary policy.
Unanticipated Impacts in Unassessed Segments
Hanesbrands (HBI) exploded 42% on reports of near $5 billion acquisition by Gildan Activewear, creating broad apparel sector momentum
Mercury Systems (MRCY) surged 24% after crushing Q4 earnings expectations with 18% revenue growth, lifting defense contractors
Trade Desk (TTD) crashed 37% on disappointing guidance despite beating Q2 earnings, worst S&P 500 performer
Technology sector gained 3.37% led by Meta approaching $2 trillion market cap and Intel rallying 5%+ after Trump meeting
Basic materials topped all sectors with 3.56% gain on China stimulus hopes following tariff extension
Small-cap biotech rally saw XBI gain 4.1% on renewed M&A speculation and rate cut benefits
Regional banks (KRE) surged 3.8% as net interest margin compression fears eased with gradual Fed cuts now expected