For those still active in markets, the new week brings pockets of notable event risk, as well as further poor liquidity conditions, which could result in exacerbated price moves. However, this week is less about rationalising the ‘why’ behind the market moves and more about recognising that the crosscurrents from remaining end-of-year portfolio flows will be the likely driver of price action.

As such, we continue to search for high-probability set-ups and react to what the markets put in our path, with the strategies deployed and our approach to managing risk determined by the compression/expansion in the ranges, volatility and intraday direction.

The ‘surprisingly’ outsized sell-off on Friday in the respective US equity indices was a clear example of not overthinking the ‘why’. Where despite a 1.1% decline for the S&P500 there was no obvious smoking gun or trigger to fundamentally justify such a broad-based sell-off in US equity.

There was talk doing the rounds of rebalancing flows notably from mutual funds, which have strict end-of-month/quarter rebalancing mandates. This makes sense – however, given the sell-off in US Treasuries through Q424, these same players should have also been buyers of US Treasuries to rebalance the fixed income leg of the portfolios. That aspect wasn’t obvious, with UST 5yr to 30yr yields 3bp-5bp higher on Friday.

Some have also suggested that the broad sell-off seen in USTs, JGBs, UK gilts and German bunds on Friday was a factor weighing on equity risk, as it was for gold and silver.

US 10yr Treasury vs Citi US economic surprise index – the recent move higher in yield is not backed by the data.