The upcoming week is the last full trading week of the year. Amid sharp Brexit or monetary policy moves like those from GBP, AUD, CAD and NZD and with US tax reform in the air; what should we expect for liquidity and activity levels when evaluating trades?

Talking Points:

  • The S&P 500 managed another record high to close the week while VIX closed its 50th day of 2017 below 10
  • Risk trends are stretched, but liquidity matters more to the pace and direction of markets moving into these final weeks
  • Extending US equity trends, fostering key reversals like AUD/USD or motivating dormant volatility makes for highly unlikely trading

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We have closed out an extremely active - at least in calendar terms - and one of the last normally liquid weeks of the year. And, despite the urgency to get your trades in between we start going over the liquidity cliff, there was very little in the way of genuine development. Sure, there was a push to fresh all-time highs for the S&P 500 and Dow Jones Average, but there wasn't a consistent rise in risk assets. Nor was there a meaningful reversal in well-worn trends in other veins. Monetary policy was a particularly active theme from a headlines point of view this past week between the Fed, ECB and BoE rate decisions along with unexpected headlines from RBNZ and BoC Governors that has inspired a shift in rate speculation. The largest headlines seemed to render the smallest market results while the virtually under-the-radar updates spurred at least moderately productive trading opportunities. Yet, none of these developments seems capable of fostering meaningful follow through into the coming week.

Ahead, we have the last full week of trade for the year. Conditions are already extremely sedate with US equities holding highs as a sign of the influence from aggressive stimulus emanating from the major central banks. The VIX is without doubt the harshest signal of abnormal conditions. Closing well below 10 is not unreasonable given it is a measure with a time frame for the month forward. That would include the full drain during the Christmas period. Historically, the two other periods in history where the measure was below 10 was during similar holiday periods in 1993 and 2006. Yet, what differentiates then and now is the reality that we have been at these extreme levels for more than 20 percent of the year. This has been a very clear curb on mounting truly convincing moves of continuation and certainly reversal. Of course, there have been bouts of risk chase from Bitcoin to junk bonds to equities; but they draw greater and greater appreciation for how unstable they truly are from their participants. Add to that the seasonal drop off, and trading approach matters much more over the next week.

While it is possible to see some modest trends, breakouts or reversal develop over the coming week; it would require a remarkable depth of abject complacency and/or have to follow a string of very specific surprises. The passing of tax reform can prove to be one of those surprises, but how much of windfall will it be for a market like the S&P 500 where it has risen 27 percent since the US election in large part in anticipation of exactly this program or the Dollar where it has largely ignored the progress of the effort each step of the way? In terms of scheduled event risk the Brexit progress at the EU Summit was registered and it has deflated the Pound. While talks can advance to the next stage, they only begin in earnest three months out which leaves little time to the Article 50 close date. Take a look at the tested range bounds of GBP/USD, EUR/GBP and GBP/JPY. Ranges are more robust in these conditions. Monetary policy charges for the Canadian, Australian and New Zealand Dollar have produced some volatility and even tentative breaks; but their activity should be read in context. There are opportunities in this upcoming week, but set your expectations appropriately. We try to do just that in this weekend Trading Video.

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