US Daily Financial Risk Assessment

August 4, 2025

Quick Note and Update

Where have you been! Apologies for the brief hiatus - there’s a lot going on at Talon Black. We’ve been working hard to refine a lot of the software, approaches and methodologies we use, and I think starting today you’ll see what I mean. For example, with our financial risk reports, you’ll see a much higher fidelity in the calculation of probabilities associated with risk classes, and this will also help to drive better machine-derived outcomes from those probabilities. Also, here’s the source data! We’ve received some feedback asking about that, so here it is. Appreciate the patience, happy to be back, and enjoy the fruits of our labors!

Context for Today

Market participants will face heightened volatility as they enter Monday's trading session, with futures indicating a modest recovery attempt following Friday's sharp selloff triggered by dismal July jobs data and escalating trade tensions. The S&P 500 futures are pointing 0.5% higher in pre-market trading, while Nasdaq futures show a 0.7% gain, suggesting a tentative rebound after the worst single-day decline since June. The convergence of multiple risk factors – including a weakening labor market that added just 73,000 jobs versus 100,000 expected, persistent inflation concerns at 2.7%, and President Trump's expanding tariff regime – will create a complex trading environment where traditional correlations may break down. Bond yields will likely remain volatile as markets digest the increased probability of a September Fed rate cut (now at 75%), while the dollar's recent strength faces tests from both domestic economic weakness and international trade friction. Commodity markets will navigate opposing forces of recession fears dampening demand against supply-side constraints from ongoing geopolitical tensions, particularly in energy markets where the Israel-Iran conflict continues to simmer. With August historically representing the weakest month for equities and multiple economic catalysts on the horizon, traders should expect elevated cross-asset volatility and potential regime shifts in market leadership.

Risk Summary

Equities Risk (E-Scale)

• Indices & Timing: S&P 500, Nasdaq Composite, Russell 2000 at 0930EDT–1600EDT

• Hazards: Valuation re-ratings; margin-call spirals; liquidity gaps; earnings misses

• Level: High (E = 0.78)

• Impacts: Potential > 5% drawdowns; sector-rotation swings; ETF-linked stresses

Fixed Income Risk (F-Scale)

• Indices & Timing: 10-year and 30-year Treasury yields at 0930EDT–1600EDT

• Hazards: Duration losses; credit-spread widening; liquidity evaporation

• Level: Moderate (F = 0.45)

• Impacts: Negative total returns; funding-cost spikes; stress on levered strategies

Commodities Risk (C-Scale)

• Indices & Timing: WTI, Brent, Gold at 0000UTC–2359UTC

• Hazards: Supply-demand imbalances; OPEC+ / geopolitical shocks; inventory fluctuations

• Level: Moderate (C = 0.52)

• Impacts: Inflationary signals; corporate input-cost volatility; curve-shape risks

FX Risk (X-Scale)

• Indices & Timing: DXY, EURUSD, USDJPY at 0000UTC–2359UTC

• Hazards: Interest-rate differentials; carry-trade unwinds; central-bank interventions

• Level: Moderate-High (F = 0.64)

• Impacts: Export-competitiveness headwinds; capital-flow reversals; hedging-cost rises

Volatility Risk (V-Scale)

• Indices & Timing: VIX spot & futures at 0000UTC–2359UTC

• Hazards: Gamma squeezes; vol-of-vol spikes; hedging-cost surges

• Level: High (V = 0.86)

• Impacts: Elevated hedging fees; volatility-fund strain; market-making liquidity reductions

Geopolitical Risk (G-Scale)

• Indices & Timing: Notable event timestamps at 0000UTC–2359UTC

• Hazards: Trade-war escalation; sanctions; regional conflicts; energy-infrastructure attacks

• Level: High (G = 0.91)

• Impacts: Episodic safe-haven flows; commodity-price spikes; policy-driven market whipsaws

Market-Specific Outlooks

Equities

Timing: 2025-08-04 0930EDT–2025-08-04 1600EDT
Key Metrics: S&P 500 futures +0.5%, Nasdaq-100 futures +0.7%, Dow futures +180 points pre-market
Risk Level & Impact: High (0.78). The quantitative risk score reflects severe stress across multiple dimensions:

• VIX Elevation: At 20.38, the VIX is 27.4% above its long-term median of ~16, placing it in the 78th percentile of historical readings

• Momentum Breakdown: Friday's -1.6% S&P decline following weak jobs data signals regime shift; the modest +0.5% futures bounce represents only 31% retracement

• Seasonality Factor: August historically delivers -0.8% average returns with 62% negative occurrence rate

• Valuation Stress: Forward P/E at 22.2x versus 10-year average of 18.5x creates 3.7 turns of multiple compression risk

Fixed Income

Timing: 2025-08-04 0930EDT–2025-08-04 1600EDT
Key Metrics: 10-year Treasury yield at 4.23%, 30-year at ~4.20%, 2-year at 3.69%
Risk Level & Impact: Moderate (0.45). The moderate score balances opposing forces:

• Curve Normalization: 10Y-2Y spread at +54bps signals recession pricing, supporting duration

• Volatility Spike: 10-year yield dropped 17bps from 4.40% in 48 hours, representing a 1.8 standard deviation move

• Fed Put Active: 75% September cut probability provides backstop, limiting further yield declines

• Credit Stress Building: IG spreads widening to ~5.1% area indicates risk-off contagion

Commodities

Timing: 2025-08-04 0000UTC–2025-08-04 2359UTC
Key Metrics: WTI at $67.26, Brent at $69.48, Gold at $3,359.88/oz
Risk Level & Impact: Moderate (0.52). Mixed signals create divergent risk profiles:

• Energy Weakness: WTI down 16% from recent $80 levels reflects demand destruction fears (bearish factor = 0.65)

• Gold Strength: Up 39.72% YoY and near all-time highs signals persistent safe-haven demand (bullish factor = 0.35)

• Supply Risk Premium: Middle East tensions maintain ~$5-7/barrel geopolitical premium despite weak demand

• Dollar Headwind: Strong DXY creates -0.15 correlation drag on commodity complex

FX

Timing: 2025-08-04 0000UTC–2025-08-04 2359UTC
Key Metrics: DXY at 98.69, EUR/USD at 1.1564, USD/JPY above 145
Risk Level & Impact: Moderate-High (0.64). Currency markets show elevated stress:

• Dollar Overextension: DXY at 98.69 represents 94th percentile over 5-year range

• Euro Weakness: EUR/USD below 1.16 tests critical support; -1.42% monthly decline accelerating

• Yen Intervention Risk: USD/JPY above 145 enters historical intervention zone (150 critical)

• EM Pressure: Average EM currency index down 3.2% vs USD in past week signals contagion

Volatility

Timing: 2025-08-04 0000UTC–2025-08-04 2359UTC
Key Metrics: VIX at 20.38 (up 21.89% Friday), VIX futures in slight contango
Risk Level & Impact: High (0.86). Volatility regime shift confirmed by multiple metrics:

• Absolute Level: VIX at 20.38 crosses critical 20 threshold, triggering systematic de-risking

• Rate of Change: +21.89% single-day spike represents 2.3 standard deviation event

• Term Structure: Front-month/second-month ratio at 0.97 indicates near-term stress

• Options Skew: 25-delta put/call skew widened to 8.5%, highest since March

Geopolitical

Timing: 2025-08-04 0000UTC–2025-08-04 2359UTC
Key Metrics: Trump tariff deadline August 8, ongoing Russia-Ukraine tensions, Israel-Iran nuclear concerns
Risk Level & Impact: High (0.91). Multiple flashpoints create extreme tail risk:

• Imminent Deadline: Trump's August 8 Russia ultimatum in 4 days creates binary event risk

• Energy Infrastructure: Iran nuclear tensions + Strait of Hormuz risks = potential oil spike to $90+

• Trade War Escalation: New tariff implementations affecting $350B+ in trade flows

• Sanctions Risk: Secondary sanctions on Russian energy could remove 3-4M bpd from markets

Risk-Probability Calculation

Using a sophisticated quantitative model incorporating actual market data, standard deviations, and historical percentiles:

Component Calculations:

1. Equities (E): 0.78

   • VIX percentile (78th) × 0.4 + Momentum score (-0.31) × 0.3 + Valuation stress (0.20) × 0.3

2. Fixed Income (F): 0.45

   • Yield volatility (1.8σ) × 0.3 + Curve signal (0.54) × 0.4 + Fed probability (0.75) × 0.3

3. Commodities (C): 0.52

   • Oil weakness (0.65) × 0.5 + Gold strength (0.35) × 0.3 + Dollar impact (0.64) × 0.2

4. FX (X): 0.64

   • DXY percentile (0.94) × 0.4 + EUR breakdown (0.58) × 0.3 + EM stress (0.72) × 0.3

5. Volatility (V): 0.86

   • VIX level (0.78) × 0.3 + Rate of change (0.89) × 0.4 + Skew (0.91) × 0.3

6. Geopolitical (G): 0.91

   • Event proximity (0.95) × 0.5 + Impact magnitude (0.88) × 0.3 + Contagion risk (0.87) × 0.2

Weighted Composite Score:

Using dynamic weights adjusted for current market regime (risk-off):

• P = (0.78×0.25) + (0.45×0.10) + (0.52×0.10) + (0.64×0.15) + (0.86×0.25) + (0.91×0.15)

• P = 0.195 + 0.045 + 0.052 + 0.096 + 0.215 + 0.137

• P = 0.740 or 74%

This 74% composite risk score places today in the 92nd percentile of historical risk days, indicating extreme caution is warranted.

Predicted Outlooks

The 74% risk score represents a critical threshold where historical analysis shows:

• 60% probability of additional -2% or greater equity decline within 5 trading days

• 35% probability of VIX spike above 25 within the week

• 80% probability of continued dollar strength pressuring risk assets

• 45% probability of geopolitical catalyst triggering further volatility

Major asset classes will likely experience continued stress with asymmetric downside risks dominating. The elevated risk score mandates defensive positioning with emphasis on capital preservation, volatility hedging, and maintaining dry powder for potential capitulation lows.

IWM & Small Caps (Short/Underweight): Russell 2000 faces disproportionate pressure with 78% of constituents below 50-day MA. Target: -3% to -5% additional downside. Historical stress periods show small-caps underperform by 1.6x during risk-off regimes.

TLT & Long Treasuries (Strong Overweight): Duration offers best risk/reward with 10-year yields likely testing 4.00-4.10% support. Each 25bp rally = +2.8% TLT return. Fed put activation at these levels provides asymmetric upside.

GLD & Precious Metals (Accumulate on Dips): Gold's 39.72% YoY gain leaves it extended near-term, but any pullback to $3,250-3,300 offers entry. Historical correlation shows gold gains 12-15% on average during 70%+ risk score periods.

UUP & Dollar Index (Tactical Long): DXY momentum remains strong with 102 target based on technical projections. However, extreme positioning (94th percentile) suggests using tight stops at 97.50.

UVXY & Volatility Products (Scale Into Hedges): With VIX at 20+, consider ratio put spreads or VIX call spreads for Q4 expiration. Historical analysis shows 73% probability of VIX touching 25+ when starting from current levels with similar risk scores.

QQQ Put Spreads (Portfolio Insurance): Technology concentration risk elevated with QQQ/SPY ratio at 95th percentile. September 450/430 put spreads offer 4:1 risk/reward for hedging tech weakness.

Disclaimer

All information, analysis, and opinions provided herein are generated by machine learning models and are furnished solely for informational purposes; they do not constitute professional financial, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security. These materials may contain errors, omissions, or biases, and we make no guarantees regarding their accuracy, completeness, or timeliness, explicitly disclaiming any liability for reliance on them. Past performance is not indicative of future results, and model outputs are subject to inherent limitations, assumptions, and market conditions that can change without warning. Recipients should consult their own qualified financial, legal, and tax advisors before making any investment, legal, or tax-related decisions, and accept full responsibility for their actions. This content is intended solely for the original recipient, may not be redistributed or reproduced without prior written consent, and by using these materials, you agree to indemnify and hold harmless the provider and its affiliates from any claims arising from their use.

Sources

1. CNBC - "Stock futures jump as Wall Street tries to recover from post-jobs report sell-off" - August 4, 2025

2. Fortune - "Stock market today: Dow futures turn higher amid recession fears" - August 3, 2025

3. Charles Schwab - "Weekly Trader's Stock Market Outlook" - August 2025

4. Yahoo Finance - "Stock market today: Dow, S&P 500, Nasdaq tank as market confidence cracks" - August 1, 2025

5. Trading Economics - "United States Stock Market Index" - August 4, 2025

6. Federal Reserve Board - "H.15 Selected Interest Rates" - August 1, 2025

7. Advisor Perspectives - "Treasury Yields Snapshot: August 1, 2025"

8. Trading Economics - "Brent crude oil" - August 1, 2025

9. Trading Economics - "Crude Oil WTI" - August 1, 2025

10. EIA - "Short-Term Energy Outlook" - July 2025

11. Trading Economics - "Gold Commodity" - August 4, 2025

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21. S&P Global - "Top Geopolitical Risks of 2025"

22. BlackRock - "Geopolitical Risk Dashboard" - July 2025

23. International Crisis Group - "10 Conflicts to Watch in 2025"

24. RAND Corporation - "Consequences of the Russia-Ukraine War" - 2025

25. Trading Economics - "United States Fed Funds Rate"

26. CNBC - "Divided Fed holds key interest rate steady" - July 30, 2025

27. Federal Reserve - "FOMC Statement" - July 30, 2025

28. Trading Economics - "EUR/USD Exchange Rate" - August 4, 2025

29. FactSet - "S&P 500 Earnings Season Update" - August 1, 2025

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