Global markets enter a “turbulent summer”: watch out for the Fed’s shifting stance, the yen crisis, and the earnings-season test

A seemingly calm global financial market is accumulating the energy for a coming storm.

Yie-Hsin Hung, CEO of State Street Investment Management, told the Financial Times this week that the new U.S. Federal Reserve chair, Worsh, has intentionally reduced forward guidance, making the market’s ability to gauge the path of monetary policy increasingly difficult. “This will introduce volatility and uncertainty.”

The yen-to-U.S. dollar exchange rate this week broke through the 162 level, touching a nearly 40-year low, and renewed market alertness about the potential risks of yen carry trades. Vincent Mortier, Director of Investments at Amundi, advises: diversify risk as much as possible and hedge comprehensively.

Meanwhile, U.S. stock index volatility (VIX) remains low, but internal market stress has quietly climbed to its highest level in recent years. UBS’s derivatives strategy team’s “Turbu-lens” market fragility indicator is currently as high as 0.9 (range -1 to 1), the highest level since mid-September 2025. Historically, readings like this have often preceded a phase of sharp VIX spikes. At the same time, the second-quarter earnings season—when earnings expectations are as high as 24%—is just getting underway, and elevated expectations further amplify the potential downside risks.

New Fed chair brings policy uncertainty

For the market, the new leadership at the Federal Reserve is one of the main sources of uncertainty right now.

After taking office, the new chair, Worsh, deliberately narrowed the scope and frequency of external communication, proactively reducing forward guidance about where monetary policy may head next. The Financial Times cites analysts’ views that, from a macroprudential perspective, this approach is not necessarily problematic in itself—guiding market expectations is not the Fed’s core job, and leaner, better-coordinated external communication may be more beneficial than harmful.

However, when this policy narrative overlaps with Worsh’s ambitions to push through a reform agenda, and with ongoing turmoil in the Iran situation, the picture becomes more complicated. Inflation concerns from rising oil prices have caused a clear pullback in the bond market this week. The core reason is that investors cannot determine whether Worsh will respond with policy to the modest but meaningful rise in oil prices in the near term, nor can they clarify his overall inclination regarding the Federal Reserve’s future policy direction. Bond yields are currently nearing 4.6%, further increasing valuation pressure on equity markets.

The yen again presses toward a dangerous threshold

The yen is once again becoming a potential “trigger point” for global markets.

This week, the USD/JPY pair broke through the 162 level, and the yen touched its weakest level in 40 years. The market is betting that Japanese authorities will allow inflation to run at relatively high levels while staying cautious about rate hikes.

Systemic risk tied to the yen mainly comes through two transmission paths. First, to intervene in the FX market and stabilize the yen, Japanese authorities may need to sell U.S. dollar assets—especially U.S. Treasuries—which could have ripple effects across the global bond market. Second, there are still large carry-trade positions in the market that borrow yen at low cost and then buy other global assets. If the yen sharply rebounds, these positions could face pressure to unwind, with shockwaves potentially spreading into market corners that are currently difficult to predict. The Bank of England also pointed out this week that leveraged funds—i.e., borrowed funds—have been an important driver behind the strength in global equity markets over recent months, and the scale is growing rapidly, which has never been an reassuring signal.

Under a calm VIX, market fragility rises to historical highs

Barclays strategist Emmanuel Cau characterizes the current phase of U.S. stocks as a “dangerous summer window,” arguing that beneath a seemingly stable market baseline, undercurrents are building. A team led by Barclays strategist Anshul Gupta noted that the recent decline in VIX coincides with a seasonal volatility calendar window that typically narrows, amounting to a “brief sweet spot” with limited persistence.

More noteworthy is the pronounced divergence between index behavior and individual stocks. UBS strategist Maxwell Grinacoff’s team said that current single-stock volatility is more than three times index volatility. The team warns that the gap has a higher probability of narrowing during the summer—at which time a jump in volatility at the index level could be triggered by anything, whether it’s a repricing of monetary policy or geopolitical disruptions. If systematic strategies further step up leverage, the fragility indicator reading “could truly reach +1.”

Liquidity scarcity unique to summer is another amplifier. Each summer in the Northern Hemisphere, veteran traders and investors take vacations, leaving behind more junior teams, causing trading volumes to shrink and market liquidity to fall sharply. Spreads widen, and even without substantial new information, various asset classes such as stocks, bonds, and FX become more prone to sharp swings. A vivid example occurred in the summer of 2024: a not-so-severe miss in U.S. inflation data unexpectedly battered the dollar, boosted the yen, and slammed technology stocks. Japan’s stock market then plunged 12% in a single day, and there was a time when market chatter even suggested the Fed would urgently cut rates.

A high-expectations earnings season, with risks heightened by expectations falling short

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

Analysts’ expectations for second-quarter earnings growth in S&P 500 constituent stocks are as high as 24%, and for Europe’s STOXX 600 the expectation is also 12%. Unlike prior earnings seasons, analysts have continued to raise forecasts ahead of the reporting period. The strength of that confidence also means that if actual performance disappoints the market, there is more room for adjustments and the potential downside could be sharper.

Technology is the segment that deserves especially close attention. Based on Barclays calculations, from last October to today, Apple, Meta, Amazon, Alphabet, Microsoft, and Nvidia combined have erased about $2 trillion in market value. Notably, Nvidia, the chip giant with a market cap of $5 trillion, is now trading at a price-to-earnings ratio comparable to snack company Hershey, and market enthusiasm for it has clearly cooled.

In gold and oil too, there has been a reversal that caught investors off guard. After strong performance at the start of 2026, gold just recorded its largest single-month drop since 2008, down more than 11%. Oil prices also declined against the trend amid a chorus of warnings from energy experts. These changes point to one reality: market consensus is breaking down, and the reliability of mainstream narrative logic has been significantly undermined.

On hedging strategy selection, given that stock dispersion and sector rotation may continue during earnings season, hedging tools at the index level may have limited effectiveness. Maxwell Grinacoff suggests that “single-stock options may offer better opportunities tactically.” Vincent Mortier at Amundi offers a more macro recommendation: diversify risk as much as possible and hedge comprehensively—so that “you can relax and take a vacation all summer long. That’s a good goal.”

Risk warning and disclaimer

        The market involves risk; invest prudently. This article does not constitute personal investment advice, and it does not consider any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Investing based on this is at your own risk and responsibility.