The US trading week started off chaotically, with the VIX rising by 17%, indicating that traders are feeling less secure. Former President Trump tweeted that Chicago may need National Guard troops to address its crime issues. The S&P 500 futures fell by 1.1%, and the British pound dropped by 200 pips. Concerns about sovereign debt are affecting the markets, stemming from worries about the US Treasury’s ability to repay tariff revenue. At the same time, the US dollar gained strength against several currencies, including the yen.

Mixed Market Activity

The day showed mixed results in the market as we moved through the financial calendar. This uncertainty suggests that traders are having a tough time navigating the current market situation. With volatility increasing, it may be wise to buy protection, now that the VIX has jumped 17% in just one session. While we are well below the panic levels above 80 from 2020, this rise indicates that options premiums are going up, making it costlier to hedge. We should consider purchasing put options on major indices before things escalate further. Political factors are fueling this selloff, and we should see them as a major risk in the coming weeks. Looking back at how the market reacted to domestic issues in 2021 and 2024, we know these events can lead to sharp, unexpected declines in stocks. The 1.1% drop in S&P 500 futures is a warning sign, especially after August 2025’s consumer confidence numbers dipped to 99.5. We’re witnessing a classic shift to safety, with the US dollar gaining strength even against the yen. This situation is reminiscent of the dollar rally in 2022, when the DXY index surpassed 114, tightening global liquidity. This broad strength in the dollar indicates that we should be cautious with unhedged positions in foreign currencies and commodities priced in dollars.

Global Risk Off Sentiment

The 200-pip drop in the British pound is significant and highlights ongoing weaknesses in the UK market. This movement echoes the sterling crisis from the fall of 2022. If this global risk-off sentiment continues, we should expect further weakness in the pound. A unique concern revolves around the US Treasury’s obligation to repay tariff revenue, creating uncertainty in the bond market. We haven’t encountered this specific type of sovereign risk before, making it wise to buy puts on Treasury bond ETFs like TLT as a hedge. This kind of unknown risk can lead to sudden disruptions in markets that seem stable. Create your live VT Markets account and start trading now.

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