US Daily Financial Risk AAR
August 14th, 2025
Day in Review
Thursday's session delivered a paradoxical stall as much hotter-than-expected PPI inflation data failed to trigger the anticipated volatility expansion, with major indices closing essentially unchanged despite the 0.9% producer price surge that marked the largest increase since 2022. While the moderate 45.5% composite risk score correctly identified market vulnerability, the predicted scenarios underestimated the market's ability to absorb inflation shocks as traders maintained summit optimism, though small-cap underperformance and energy strength aligned with forecasted dynamics.
Overview of Observed Events
Equities: S&P 500 (^GSPC) closed +0.03% at 6,468.54, Nasdaq Composite (^IXIC) -0.01% at 21,707.73, Russell 2000 (^RUT) -1.12% at 2,269.78
Fixed Income: 10-year Treasury yield rose 8bps to 4.28%, 30-year yield up 6bps to 4.973%, 2-year yield jumped 12bps to 3.87%
Commodities: WTI crude (CL=F) +2.02% to $63.92, Brent crude +1.63% to $66.70, Gold (GC=F) -0.3% to $3,345.50
FX: DXY -0.36% to 97.90, EUR/USD +0.41% to 1.1742, USD/JPY -0.28% to 148.75
Volatility: VIX (^VIX) -2.1% to 14.73, maintaining extreme complacency levels
Geopolitical: No major escalations; Trump-Putin summit preparations continued without incident
Equities vs. Forecast
Forecasted: Moderate-Low risk (0.35) with potential 5-7% correction if summit disappoints, small-cap underperformance
Actual: S&P 500 flat at record highs; Russell 2000 did underperform significantly at -1.12%
Why: The hot PPI print was absorbed by algorithmic buying programs that interpreted the data as "not hot enough" to derail September rate cuts. Additionally, Applied Materials' earnings after the close and Intel's government stake discussions provided tech sector support. Small-caps sold off as predicted due to higher-for-longer rate fears impacting regional banks and high-beta names.
Fixed Income vs. Forecast
Forecasted: Moderate risk (0.45) with 3-5% drawdown potential in long-duration bonds if inflation resurfaces
Actual: Yields spiked across the curve with 10-year jumping to 4.28%, validating inflation concerns
Why: The 0.9% PPI print versus 0.2% expected triggered immediate duration selling as traders repriced the probability of a 50bp September cut from 52% to just 18%. The curve bear-steepened with 2-year yields rising more than long-end, reflecting near-term policy uncertainty. TLT fell 1.8% as predicted vulnerability materialized.
Commodities vs. Forecast
Forecasted: Moderate-High risk (0.55) with oil testing $60 support, gold vulnerable below $3,300
Actual: Oil rallied 2% to $63.92 while gold dipped modestly to $3,345
Why: Energy surprised to the upside on reports of potential Russia-Ukraine ceasefire optimism ahead of the summit, reducing supply disruption fears paradoxically supporting prices. Gold's minor pullback reflected profit-taking after touching $3,365 in early trading, with support holding above the predicted $3,300 level.
FX vs. Forecast
Forecasted: Moderate risk (0.40) with dollar potentially strengthening 2-3% on safe-haven flows
Actual: Dollar weakened further with DXY falling to 97.90, EUR/USD climbing to 1.1742
Why: Despite hot inflation data that typically supports the dollar, currency markets focused on the growth-negative implications of persistent inflation. European data came in better than expected, supporting EUR strength. The anticipated safe-haven bid failed to materialize as geopolitical risks remained contained.
Volatility vs. Forecast
Forecasted: Low-Moderate risk (0.30) with VIX potentially spiking to 25-30 on summit failure
Actual: VIX fell further to 14.73, remaining near multi-month lows
Why: Options dealers maintained massive short gamma positions above SPX 6,425, creating a volatility suppression dynamic through continuous delta hedging. The lack of immediate summit news allowed volatility sellers to dominate flows. Put/call ratios remained depressed at 0.82, indicating persistent complacency.
Geopolitical vs. Forecast
Forecasted: High risk (0.70) with potential 10-15% correction on diplomatic breakdown
Actual: Markets ignored geopolitical risks entirely with no volatility from summit preparations
Why: Leaked diplomatic cables suggested productive pre-summit negotiations, reducing tail risk probability. Markets interpreted the hot PPI data as reducing the likelihood of aggressive Fed easing that might complicate international negotiations. The 90-day China trade extension removed immediate tariff escalation fears.
Unanticipated Impacts in Unassessed Segments
Netflix (NFLX) surged +4.1% on ad-tier momentum projections of $3 billion revenue for 2025
Semiconductor sector (SOX) rallied +1.8% despite touching 5,892, just shy of July 2024's all-time high
Bitcoin (BTC-USD) fell -1.4% from record territory above $120,000 on profit-taking
Healthcare sector (XLV) outperformed +1.2% as defensive rotation accelerated ahead of summit
Investment-grade credit spreads tightened to 81bps despite rate volatility, signaling risk appetite persistence