Threat of Acute Volatility Between Summer Liquidity and Middle East Headline Risks

Threat of Acute Volatility Between Summer Liquidity and Middle East Headline Risks

Depending on how much weight you put into monitoring the financial headlines – your anxiety as a market participant could be ranging from ‘extremely high’ to ‘check their pulse’ in current conditions.

 

Talking Points:

• As the Independence Day holiday approaches, expectations for a liquidity drain and favorable risk drift increase
• The added headline risk from the Israel-Iran conflict to the carry over concerns on trade wars, monetary policy and GDP leverage serious risk scenarios
• Top catalysts – event risk – in the week ahead include: June PMIs; Fed Chairman Powell testimony and the US PCE deflator

Seasonality May Create As Much Problem as Complacency

Depending on how much weight you put into monitoring the financial headlines – your anxiety as a market participant could be ranging from ‘extremely high’ to ‘check their pulse’ in current conditions. If you were purely a student of price for benchmarks like the S&P 500 (as a baseline for ‘risk’ measure) and the VIX (for ‘anticipation’ and ‘fear’), it would be fair to assume a sanguine and complacent attitude. The relative position of risk-leading benchmarks across indices, yield-bearing assets and more speculative-leaning trades are generally within easy reach of their highs – and in many cases record highs.

In the absence of external headlines, it would be easy to assume the pull of seasonal gravity was increasing as we approach the historical average nadir of volume and peak of risk appetite (via the S&P 500) in the week of the Independence holiday liquidity drain. However, to completely ignore the imposing thematic, fundamental threats to draw on the quantitative warmth of seasonal conditions would be a dangerous approach.

Chart of S&P 500 Average Weekly Performance and Volume Over the Past Century

  

Source: John Kicklighter, Standard & Poor’s

 

Concerns Over Iran Dominate Market’s Immediate Attention

For those that do monitor the headlines, the threats are both abundant with a number of the themes kept at a roiling boil or greater. It seems the persistent carry over of issues like the trade standoff between the US and major peers, a rebound in inflation expectations following tariffs, fading growth forecasts and general neutral setting in monetary policy from previous shifts towards stimulation has deadened the market to the potential negative implications to capital market assets near record highs. Where we have seen adaptation to a number of these issues, the exception to volatility potential among the pantheon of ‘grey swans’ is the situation in the Middle East.

 

This past week, President Trump stated he would give two weeks for diplomacy to play out with Iran before making a decision around whether the US would join the actions. The backdrop of market conditions makes for a environment where liquidity could prove more critical than the headline catalysts themselves. The two week timeline that President Trump offered aligns a very black-and-white outcome with potentially severe consequences to the day before a long holiday weekend, specifically July 3rd.

Chart of Google Search Interest in ‘Tariffs’, ‘Inflation’ and ‘Iran’

  

Source: John Kicklighter, Google Trends

 

Top Scheduled Event Risk Offers Many Possible Sparks

There is plenty of event risk on the docket through the coming week, but it comes against an uneven backdrop on what fundamental themes can reliably be called upon to foster market trend and is set against the backdrop of very polarizing liquidity conditions. As we pass by threats to financial stability and aspirations of fresh record highs for the buy-and-hold crowd like weaving through hibernating zombies, it’s important to recognize that catalysts for a sudden turn in focus and volatility aren’t just reserved for the unforeseen financial headlines.

 

High profile scheduled event that taps into deeper currents could also touch off an avalanche with the right (or wrong) outcome. We would do well to plot out the landmines ahead of us so that we can gauge the probability of a breach of peace by assessing what is important and what scenarios could reasonably sour the market’s mood – I will note it would be very difficult to inspire a sense of euphoria from these already ebullient levels.

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

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Another Update On Economic Pacing

Moving chronologically, the first theme to monitor in the week ahead is the sense of economic resiliency as we round out the second quarter of the calendar year while tariffs seem to ease, the broader monetary policy cycle levels out and concerns about inflation start to return. It will be some time before we start to see the official governments’ Q2 GDP readings start to cross the wires; and by the time we do, it is likely that the markets are already focusing on the developments kicking off the third quarter.

 

That is why I keep tabs on the Standard & Poor’s monthly PMI readings (composite, services and manufacturing) for a range of major economies. The preliminary June readings are due Monday for major economies like the United States, Eurozone, Japan, United Kingdom and some others. The recent market moving potency of this series has been spot per target economy – much less in aggregate for a global picture – but a collective ‘surprise’ or charged update from a dominant economy can touch off latent concerns tied to costly market peaks that are disconnected from fundamental backdrops.

Chart of PMIs as a Proxy for GDP (Monthly)

  

Source: John Kicklighter, Stand & Poor’s

 

Powell Goes Through Another Fire

The next top listing worthy of a macro monitoring is the start of Fed Chairman Jerome Powell’s semi-annual testimony before Congress on Tuesday at 14:00 GMT. This past week, the Federal Reserve held its benchmark lending rate unchanged while it raised its forecast for where the benchmark lending rate would be at the end of 2026 and 2027. Furthermore, the Summary of Economic Projections offered an upgraded inflation (PCE) forecast while the growth outlook slipped noticeably amid tariffs and the jobless rate view was adjusted upwards. Those in Congress will be questioning every aspect of those forecasts and no doubt pressure the central banker on the group’s holding its key rate at a level that is elevated to peers and not particularly conducive to fostering economic expansion.

 

Normally, the ‘hawkish’ (really ‘neutral’) lean in policy against expectations would be met by support by Republicans with a financial hawk bent worried about the scourge of unchecked inflation; but President Trump has clearly expressed his view that rates should be cut sharply and has lobbed regular criticism at Powell. The Chairman has been very curt in his dismissing any journalist’s question around the President’s criticism of his job and threats to remove him from his position, but he doesn’t have the same leeway to shutdown Senate and House members’ pointed questions on the same.

Table of Federal Reserve Board Members’ Forecasts

  

Source: Federal Reserve Summary of Economic Projections June 18, 2025

 

A Data Reminder of the Appropriateness of the Fed’s Policy Stance

Through the rest of the week, there is plenty of relevant event risk to shape general economic themes – such as US and Mexican trade figures, Japanese inflation, Chinese industrial profits and Eurozone sentiment surveys – but the most prominent listing through the end of the week is the Fed’s favorite inflation indicator, the PCE deflator. This reading doesn’t deviate frequently from the earlier release CPI figure from the BLS, but we are at a critical point in expectations with the proper path of monetary policy heavily debated that the nuance will carry significant weight.

 

Depending on how Powell’s testimony unfolds and whether Trump keeps up his verbal attacks on the Chairman, this particular data point can carry greater weight – whether that manifests in simply carrying the market’s attention forward and suppressing interest in interim themes or as tangible volatility after the release on Friday. Considering the June labor data, including NFPs, is due the following week (on an unusual Thursday prior to the Independence Day holiday closure), US monetary policy faces enough needles to compete as a top theme for market impact.

Chart of DXY Dollar Index and Implied Fed Cuts in 2025 and June 2025 to June 2026 (Daily)

  

Source: John Kicklighter, TradingView

 

 

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--- Written by John Kicklighter, Global Head of Content