The global market enters a "turbulent summer": beware of changes in the Federal Reserve, the yen crisis, and the major test of the earnings season

Author: Wall Street Journal

The seemingly calm global financial markets are accumulating energy for a storm.

Yie-Hsin Hung, CEO of State Street Investment Management, stated this week to the Financial Times that the new Federal Reserve Chairman, Waller, has deliberately reduced forward guidance, making it increasingly difficult for the market to grasp the monetary policy path, "this will introduce volatility and uncertainty."

The yen to dollar exchange rate broke through the 162 mark this week, reaching a nearly 40-year low, raising market awareness of the potential risks surrounding yen carry trades. Amundi's Chief Investment Officer Vincent Mortier advises: diversify risks as much as possible and hedge comprehensively.

Meanwhile, the volatility index (VIX) of U.S. stocks remains low, but internal market pressures have quietly risen to near recent highs. UBS's derivatives strategy team's "Turbu-lens" market fragility indicator currently reads as high as 0.9 (range from -1 to 1), the highest level since mid-September 2025, and historically, such readings often foreshadow a sharp rise in the VIX. At the same time, the earnings expectations for the second quarter reporting season are as high as 24%, further amplifying potential downside risks.

New Fed Chair Brings Policy Uncertainty

For the market, the new leadership of the Federal Reserve is currently one of the main sources of uncertainty.

Since taking office, Chairman Waller has deliberately narrowed the scope and frequency of external communication, actively reducing forward guidance on the next steps of monetary policy. The Financial Times cites analysts' views that, from a macroprudential perspective, this approach is not without merit—guiding market expectations is not the Fed's primary job, and a more streamlined and coordinated external communication may be more beneficial than harmful.

However, when this policy narrative overlaps with Waller's ambition to advance reform agendas and the ongoing turmoil in Iran, the situation becomes complex. The inflation concerns driven by rising oil prices have led to a noticeable pullback in the bond market this week, primarily because investors cannot determine whether Waller will respond to the recent modest but significant rise in oil prices with policy actions, nor can they clarify his overall inclination towards the Fed's future policy direction. Bond market yields are currently approaching 4.6%, further increasing valuation pressure on the equity market.

Yen Approaches Dangerous Threshold Again

The yen is once again becoming a potential "trigger point" in the global market.

This week, the dollar-yen exchange rate broke through the 162 mark, with the yen reaching its weakest level in 40 years. The market bets that Japanese authorities will allow inflation to run at relatively high levels while remaining cautious about interest rate hikes.

The systemic risks surrounding the yen mainly stem from two transmission paths. First, Japanese authorities may need to sell dollar assets—especially U.S. Treasuries—to intervene in the currency market and stabilize the yen, which could trigger ripple effects in the global bond market. Second, there are still many carry trade positions in the market that borrow yen at low costs to buy other global assets. If the yen rebounds significantly, these positions will face pressure to be forcibly closed, and the shockwaves could spread to currently unpredictable corners of the market. The Bank of England also pointed out this week that leveraged funds (i.e., borrowed funds) have been a significant driving force behind the recent strength of global stock markets, and their scale is growing rapidly—this has never been a reassuring signal.

VIX Calm, Market Fragility Rises to Historical Highs

Barclays strategist Emmanuel Cau characterizes the current phase of U.S. stocks as a "dangerous summer window," believing that beneath the seemingly stable market benchmarks, undercurrents are surging. The Barclays strategist Anshul Gupta's team points out that the recent decline in the VIX coincides with a seasonal calendar window where volatility typically narrows, representing a "brief sweet spot" with limited sustainability.

More concerning is the significant divergence between indices and individual stocks. UBS strategist Maxwell Grinacoff's team notes that current single-stock volatility has exceeded index volatility by more than three times. The team warns that the probability of this gap narrowing during the summer is high—at which point, whether through monetary policy repricing or geopolitical disturbances, volatility at the index level could surge. If systemic strategies further leverage, this fragility indicator reading "could truly reach +1."

The summer's characteristic liquidity shortage acts as an amplifier. Every summer in the Northern Hemisphere, seasoned traders and investors take vacations, leaving behind more junior teams, resulting in reduced trading volumes and a sharp decline in market liquidity. Wider spreads mean that even in the absence of substantial new information, various assets such as stocks, bonds, and currencies are more likely to experience violent fluctuations. A vivid example occurred in the summer of 2024: a not-so-serious disappointment in U.S. inflation data unexpectedly devastated the dollar, boosted the yen, and crashed tech stocks, with the Japanese stock market plummeting 12% in a single day, and there were rumors that the Fed would urgently cut interest rates.

High Expectations for Earnings Season, Risks Lie in Disappointment

Against this macro backdrop, a high-expectation earnings season is officially kicking off, further concentrating market risks.

Analysts expect a 24% growth in earnings for S&P 500 constituents in the second quarter, with expectations for the European Stoxx 600 also reaching 12%. Unlike previous earnings seasons, analysts have continuously raised forecasts on the eve of the reporting period, and this strong confidence means that if actual performance disappoints the market, the adjustment space will be larger, and the declines may be steeper.

The tech sector requires close attention. According to Barclays, from October last year to now, Apple, Meta, Amazon, Alphabet, Microsoft, and Nvidia have collectively evaporated about $2 trillion in market value. Notably, the chip giant Nvidia, with a market capitalization of $5 trillion, now has a price-to-earnings ratio similar to that of snack company Hershey, indicating a clear cooling of market enthusiasm for it.

The gold and oil sectors have also seen unexpected reversals for investors. After a strong performance at the start of 2026, gold prices recently recorded their largest monthly decline since 2008, dropping over 11%; oil prices also fell against a backdrop of warnings from energy experts. These changes point to a reality: market consensus is disintegrating, and the reliability of mainstream narrative logic has significantly diminished.

In terms of hedging strategies, given that individual stock differentiation and sector rotation may continue during the earnings season, the effectiveness of index-level hedging tools may be limited. Maxwell Grinacoff suggests, "single-stock options may provide better tactical opportunities." Vincent Mortier from Amundi offers a more macro suggestion: diversify risks as much as possible and hedge comprehensively—this way, "one can relax and vacation all summer, which is a nice goal."