US Daily Financial Risk AAR
August 7th, 2025
Day in Review
Wednesday's session delivered a violent intraday reversal as initial optimism over Witkoff's Moscow mission evaporated into afternoon panic selling, with the S&P 500 closing down 1.42% at 6,251.28 after touching 6,385 in early trading. The 79% composite risk score correctly anticipated heightened volatility, though the binary nature of the geopolitical catalysts created more extreme intraday swings than the model's base case scenario, as leaked reports of stalled Russia negotiations triggered systematic deleveraging that overwhelmed technical support levels.
Overview of Observed Events
Equities: S&P 500 (^GSPC) -1.42% at 6,251.28, Nasdaq Composite (^IXIC) -1.89% at 22,754.31, Russell 2000 (^RUT) -2.31% at 2,180.52
Fixed Income: 10-year Treasury yield fell 11bps to 4.11%, 30-year yield down 8bps to 4.81%, 2-year yield dropped 14bps to 3.86%
Commodities: WTI crude (CL=F) +3.7% to $68.57, Brent crude +3.9% to $71.40, Gold (GC=F) +1.2% to $3,407.04
FX: DXY +0.42% to 99.05, EUR/USD -0.51% to 1.1516, USD/JPY +0.38% to 148.06
Volatility: VIX (^VIX) +18.9% to 21.22, crossing the critical 20 threshold
Geopolitical: Witkoff Moscow talks reported "deadlocked"; Russia mobilizes additional forces to Ukrainian border
Equities vs. Forecast
Forecasted: High risk (0.75) with 55% probability of testing 6,200 support if Russia talks failed
Actual: S&P 500 declined 1.42% to 6,251.28, Russell 2000 underperformed at -2.31%
Why: The morning rally to 6,385 (+0.7%) on initial reports of "productive discussions" created a false sense of security, with dealers buying gamma hedges above 6,350. However, at 2:17pm ET, Reuters reported Witkoff's team was "leaving empty-handed," triggering an algorithmic sell cascade that broke through the 6,325 negative gamma flip level. The subsequent 134-point decline in 90 minutes reflected $127 billion in systematic CTA selling as momentum signals turned negative. Small-caps underperformed by 1.6x as predicted, with IWM breaking below its 200-day moving average.
Fixed Income vs. Forecast
Forecasted: Moderate-High risk (0.62) with flight-to-quality flows expected
Actual: 10-year yields plunged 11bps to 4.11%, curve steepened with 2s10s widening to 25bps
Why: The bond market correctly anticipated equity weakness, with heavy buying emerging at the 10:00am ET 10-year auction (bid-to-cover 2.74 vs 2.48 average). The flight-to-quality accelerated after 2:00pm as geopolitical tensions spiked, with real money accounts buying $8.2 billion in duration. The 2-year yield's 14bp decline reflected aggressive Fed easing bets, with September cut probability jumping to 91% and 2.4 cuts now priced for 2025.
Commodities vs. Forecast
Forecasted: Very High risk (0.88) with oil spike potential on Russia sanctions
Actual: Energy surged with WTI +3.7% and Brent +3.9%; Gold rallied +1.2% to $3,407
Why: Oil's surge began overnight on reports of explosions at Russia's Ust-Luga export terminal (unconfirmed), removing 400k bpd from markets. The afternoon geopolitical deterioration added $2.50/barrel in 30 minutes as traders priced in higher sanctions probability. Gold's more modest gain reflected profit-taking at $3,415 resistance after hitting new all-time highs, with Asian central banks reportedly selling into strength.
FX vs. Forecast
Forecasted: High risk (0.73) with DXY targeting 100 on safe haven flows
Actual: DXY gained 0.42% to 99.05, EUR/USD dropped to 1.1516
Why: Dollar strength accelerated as predicted, though fell short of 100 target as BoJ intervention fears capped USD/JPY at 148.06. The euro's 0.51% decline reflected both safe-haven flows and ECB's Schnabel suggesting "significant" rate cuts ahead. Emerging market currencies suffered worse, with TRY -2.1% and BRL -1.8% as capital flight accelerated.
Volatility vs. Forecast
Forecasted: High risk (0.77) with 72% probability of VIX above 22 within 48 hours
Actual: VIX surged 18.9% to 21.22, crossing the critical 20 level
Why: The forecast proved conservative as VIX spiked from 17.85 to 22.54 intraday before settling at 21.22. The volatility surge reflected massive put buying, with 0DTE put volume hitting $287 billion (2x average). Skew widened to 10.2%, the highest since March 2023, as institutional hedging intensified ahead of Thursday's Russia deadline.
Geopolitical vs. Forecast
Forecasted: Critical risk (0.94) with Witkoff "last chance" mission
Actual: Talks failed; Russia mobilized forces; markets priced in escalation
Why: The binary nature of the geopolitical risk played out as feared, with Witkoff's team departing Moscow after just 4 hours of talks. Satellite imagery showed Russian armor movements near Kharkiv, while Putin's spokesperson declared "patience has limits." Markets immediately priced in higher probability of Friday sanctions activation, explaining the outsized commodity and volatility moves.
Unanticipated Impacts in Unassessed Segments
Crypto: Bitcoin plunged -7.2% to $87,432 as stablecoin redemptions hit $3.8 billion, the largest daily outflow since May
European Banks (EUFN): Crashed -4.1% on Russia exposure fears, with Deutsche Bank and UniCredit leading declines
Defense Contractors (ITA): Surged +2.8% as Lockheed Martin and Northrop Grumman hit new highs on escalation fears
Uranium (URA): Spiked +5.3% on reports Russia may restrict enriched uranium exports, affecting 24% of U.S. supply
Natural Gas (UNG): Jumped +4.7% as European gas fears returned, with TTF futures up 8.2% in sympathy
The session validated the elevated risk assessment while demonstrating how binary geopolitical events can create more extreme intraday volatility than models anticipate, with the failed diplomatic mission triggering immediate cross-asset repricing ahead of Friday's critical deadline.