Talking Points:
• Historically, December sees positive performance in speculative assets and a drop in volume and volatility
• As recently as last year, high volatility despite holiday trade caught investors off guard
• Conditions are ripe for a surge in volatility and there is plenty of event risk to set markets off ahead
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
We will enter the final trading month of the calendar year next week, and with the transition comes expectations of quiet market conditions and speculative buoyancy that is a hold over from historical seasonality studies. Over the decades, the breaks in speculative activity around western world and global holidays has encouraged retrenchment in the form of curbed activity and a preference for rebalance. Over the past 35 years, the S&P 500 has enjoyed one of its best performances through December while both its volume and volatility (VIX) taper off through the period. Yet, there is reason to remain cautious and skeptical.
As recent as last year, we had seen the market's break from conformity to historical norms. A pickup in activity prompted by holdover volatility (from the previous August fireworks), international uncertainties like China and a key event in the December 2015 Fed rate hike led to unusual active conditions and a tip lower in global speculation that fully ran its course through the opening weeks of 2016. Many of the same elements that befell that period remain. Most important is the reality that trading conditions are clearly capable of turning to dead quiet to extremely active at the drop of a hat...or unexpected event. The lingering threat of sudden shocks means it frightfully easy to make for a violent holiday period.
Motivation, however, is still important in this equation. While many of the sparks over the past year-and-a-half have been unknown; the bulk have been readily visible ahead of their shocks. There are many themes and catalysts currently that could shake an entire region of the global financial map or even lead to a global shock. From the US, we have the uncertainty of President-elect Donald Trump's policies which have led with a very anti-trade promise as well as the December 14th FOMC rate decision already fully expected to deliver a hike. In the UK, Brexit remains the critical theme with a global audience to protectionism. From Europe, the threat to EU stability will be stirred by the Italian Referendum, Spanish election and Brexit itself. Then there is oil's oscillation and pent of pressure ahead of next week's OPEC meeting. These are just a few of the imminent risks facing the global markets. We discuss how December's activity levels will determine how we approach trading in this weekend Strategy Video.
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