The global market is entering a "summer of turmoil": beware of changes in the Federal Reserve, the yen crisis, and the challenges of earnings season.

The calm global financial markets are accumulating energy for a storm. Yie-Hsin Hung, CEO of State Street Investment Management, told the Financial Times this week that the new Federal Reserve chairman, Powell, 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 level this week, hitting a nearly 40-year low. The potential risks surrounding the yen carry trade once again raised market concerns. Vincent Mortier, investment director at Amundi, suggested diversifying risks and fully hedging. At the same time, the volatility index (VIX) of the US stock index remains low, but internal market pressures have quietly climbed to near yearly highs. The "Turbu-lens" market fragility index from UBS's derivative strategy team currently reads as high as 0.9 (on a scale of -1 to 1), the highest level since mid-September 2025. Historically, such readings often indicate a significant increase in VIX. Meanwhile, with second-quarter earnings expectations as high as 24%, the earnings season has just begun, further amplifying potential downside risks. Federal Reserve's new chairman brings policy uncertainty For the market, the new Federal Reserve leadership is one of the main sources of uncertainty. After taking office, the new chairman Powell deliberately narrowed the scope and frequency of external communication, actively reducing forward guidance on the next steps in monetary policy. According to analysts cited by the Financial Times, from a macro-prudential perspective, this approach is understandablemanaging market expectations is not the Fed's primary job, and more streamlined and coordinated external communication may have more benefits than drawbacks. However, when this policy narrative is combined with Powell's ambitious reform agenda and ongoing turmoil in Iran, the situation becomes more complex. Rising oil prices have led to inflation concerns, causing a significant pullback in the bond market this week. The fundamental reason is that investors cannot determine whether Powell will respond to the recent minor but substantive increase in oil prices or clarify his overall inclination towards the future policies of the Federal Reserve. Bond yields are currently approaching 4.6%, further increasing valuation pressures on equity markets. Yen once again approaches a dangerous threshold The yen is once again becoming a potential "tipping point" for global markets. This week, the dollar to yen exchange rate broke through the 162 level, with the yen hitting a 40-year low, as 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 around the yen mainly come from two transmission paths. First, if the Japanese authorities need to intervene in the foreign exchange market to stabilize the yen, they may need to sell US dollar assets, particularly US Treasury bonds. This operation could create ripples in global bond markets. Second, there are still a large number of carry trade positions in the market that borrow yen at low costs and then buy other global assets. Once the yen rebounds significantly, these positions may face pressure to liquidate, and the shock waves may spread to unpredictable corners of the market. The Bank of England also pointed out this week that leveraged funds (i.e., borrowed funds) are an important DRIVING force in the recent strength of global stock markets, and their scale is growing rapidly, which is not a reassuring signal. Amid calm VIX, market fragility climbs to historical highs Barclays strategist Emmanuel Cau has described the current stage of the US stock market as a "dangerous summer window", believing that beneath the seemingly stable market benchmarks, there are turbulent undercurrents. The Barclays strategy team led by Anshul Gupta pointed out that the recent decline in VIX coincides with a calendar window in which seasonal volatility typically narrows, making it a "short-lived sweet spot" with limited sustainability. What is more notable is the significant deviation between the index and individual stocks. The UBS strategy team led by Maxwell Grinacoff pointed out that the current individual stock volatility has exceeded the index volatility by more than three times. The team warned that this gap is more likely to narrow in the summerwhether it is a repricing of monetary policy or geopolitical turmoil, either could trigger a sharp increase in volatility at the index level. If systemic strategies further leverage across the board, the fragility index reading "could truly touch +1". The seasonal lack of liquidity is another amplifier. During the northern hemisphere summer, experienced traders and investors tend to go on vacation, leaving behind more junior teams. As a result, trading volume shrinks, and market liquidity sharply declines. Spreads widen, and various asset classes such as stocks, bonds, and currencies are more likely to experience severe fluctuations even without substantial new information. A vivid precedent is the summer of 2024: a mildly disappointing US inflation data unexpectedly hit the dollar, pushed up the yen, hammered tech stocks, and led to a single-day 12% plunge in the Japanese stock market, with rampant speculation that the Federal Reserve would cut interest rates urgently. Highly anticipated earnings season, risks lie in expectations falling short Against the aforementioned macro backdrop, a highly anticipated earnings season is now officially underway, further concentrating market risks. Analysts have high expectations for the earnings growth of S&P 500 index components in the second quarter, reaching as high as 24%, with similar expectations for the Euro Stoxx 600 index at 12%. Unlike previous earnings seasons, analysts have continued to raise forecasts on the eve of the reporting period, indicating strong confidence. However, if actual performance disappoints the market, there is more room for adjustment and possibly steeper declines. The tech sector deserves particular attention. According to Barclays calculations, since October last year, Apple, Meta, Amazon, Alphabet, Microsoft, and Nvidia have collectively evaporated about $2 trillion in market value. Of note is Nvidia, a chip giant with a market capitalization of $5 trillion, whose price-earnings ratio is now comparable to that of a snack company, Hershey. It is evident that the market's enthusiasm for Nvidia has cooled significantly. Unexpected reversals have also occurred in the gold and oil price areas. After experiencing strong performance at the start of 2026, the gold price has just recorded its largest monthly drop since 2008, with a decline of over 11%; oil prices have also fallen against a backdrop of warnings from energy experts. These changes collectively point to a reality: market consensus is unraveling, and the reliability of mainstream narrative logic has greatly diminished. In choosing hedging strategies, given the potential continued differentiation of individual stocks and sector rotation during the earnings season, the effectiveness of hedging tools at the index level may be limited. Maxwell Grinacoff from UBS suggests that "single stock options may provide better opportunities tactically". Vincent Mortier from Amundi offers a more macroscopic suggestion: diversify risks as much as possible and hedge comprehensivelythis way, "you can relax on vacation throughout the summer, which is a good goal." This article was reprinted from "Wall Street News" by Zhang Yaqi; GMTEight Editor: Huang Xiaodong.