Market Brief: Volatility subsides as event risks fade

‘Tis the calm before year-end, when all through the street, Not a currency is stirring—even the yen is tucked in its seat. Dollar short positions are hung by low vols with care, In hopes that Fed easing soon will be there. Traders are nestled all snug in their carry-trade beds, While dreams of smooth returns dance in their heads. And CFOs in their spreadsheets, and dealers in our caps, Have settled our brains for a long euro nap. With central banks humming “data-dependence,” And markets downplaying threats to their independence, We’ve priced every possible outcome as tidy and small— No tail risk at all. No tail risk at all. But what if, in 2026, there arose such a clatter— A whisper, a headline, a what-if-this-matters? Away to their terminals traders might dash, Refreshing their screens, checking their cash. When, what to investors’ wondering eyes could appear, But a cluster of risks parked around midyear: Trade spats half-resolved and bubbles half-run, Investors gobbling up issuance—until suddenly none. A growth scare, a fiscal shock, Central banks forced from their price-stability docks. More rapid than algos, valuations catch flame, As finance writers whistle and call it by names: “Now vol! Now liquidity! Now gamma—don’t ignore! On skews! On basis! On spreads evermore!” Like correlations before a financial crisis fly, Trading ranges rise straight up to the sky. So up to the limits unhedged losses soar, With margins all tightened—and P&Ls more. And then, in a twinkling, across every chart, Quiet assumptions start falling apart. As traders draw in their heads and look down, Uncertainty will smile thinly back, with a long-settled frown. Speaking not a word, but going straight to its work, Repricing each cashflow, each hedge, each quirk. And laying a finger aside of its nose, Reminding us how fast market calm can blow. Heed this old warning, delivered tonight: Low vol’s not safety—it’s risk out of sight. When turbulence comes—and one day it will— Those practising good risk management will sleep contented and still. So we exclaim, ere we vanish from sight: “Happy hedging to all—and to all a good night.”

Note: Distribution of the Morning Market Brief will resume on Monday, January 5, but I will be on deck, and will update you if there are any unexpected market events. Thank you for reading in 2025, enjoy a wonderful holiday season, and have a happy, healthy and prosperous new year!

Market Overview

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

Economic Calendar

*Please note: several US data releases have been removed, pending confirmation of release schedules from official statistical agencies.