It will be a holiday-shortened trading week in the U.S., with markets closed on Thursday for Thanksgiving and trading half a day on Friday. Still, there will be plenty of economic data and market activity to keep us busy, including major GDP, PCE, retail sales, and PPI reports. Additionally, there will be coupon issuances, along with two Treasury settlement dates this week and another one on Monday after the holiday.

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As I noted in this week’s video update, over the next five trading sessions, we’ll have three calendar settlement dates—on the 25th, the 28th, and December 1st. Across those three settlement dates, roughly $150 billion of liquidity will be drained from the marketplace. That could put upward pressure on overnight funding rates, especially as we approach month-end and the GSE cash that entered the market last week begins to leave. This could add additional strain and potentially push overnight funding rates back above 4%, while also leading to increased usage of the standing repo facility as we move through the rest of this shortened trading week.

Also, as previously noted, since October 30th, there have been 9 Treasury settlement dates, and the index has finished lower on 7 of those 9, with an average decline of nearly 1.2% based on S&P 500 futures returns on those days. It really makes you wonder—heading into a holiday-shortened trading week with lighter liquidity and thinner trading volumes—what that could mean for the next five trading sessions.

The Friday rally, which saw the S&P 500 rise by about 1%, appeared to be a classic volatility-crush day. As noted in Thursday’s write-up, implied volatility on the VIX 1-Day was extremely high at nearly 29, which set the stage for a sharp drop back to 22. Interestingly, the VIX 1-Day traded mostly sideways throughout Friday’s session, making a couple of attempts to break lower but failing to do so, and ultimately closing around 23.5—still a fairly elevated level of implied volatility.

Given that setup, it wouldn’t be surprising to see the first half of Monday’s session attempt to rally and recover some of the losses from the final hour and a half of trading on Friday, when the index fell from around 6,660 to 6,600. It’s possible we could see a 1% move higher before midday, potentially retracing back to Friday afternoon’s highs and pushing VIX 1-Day even lower.

However, with multiple settlement dates and Treasury auctions this week, caution is warranted—especially in a thin, holiday-shortened trading environment.

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On top of that, there are developments overseas. Japan has approved a large stimulus package, which could still have ramifications for the Japanese bond market and the FX market. And in the UK, the budget will be revealed on the 26th, which could have major implications for gilts and the pound. So this week is not likely to be a walk in the park for market participants. Investors who believe a bottom may be in place for the S&P 500 could be in for a surprise by Monday or Tuesday of next week—December 1st or 2nd.

But again, that’s why they play the game.

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