Always on the Brink

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Always on the Brink

More war in the Middle East... The market is looking through it... The Federal Reserve is on deck... Powell takes the stage again Wednesday... 'Surprises' to consider... Volatility could be ahead...

'Iran cannot have a nuclear weapon'...

That's what President Donald Trump has repeatedly said over the past few months.

While the U.S. and many other developed nations have plenty of these weapons, the traditional Western allies want to avoid a nuclear arms race in the Middle East.

That's why the U.S. has been trying to negotiate a deal for Iran to stop developing nuclear weapons.

Well, it doesn't look like Iran will have these weapons for some time... but not because of diplomacy.

On early Friday, Israel attacked Iran's coveted nuclear development sites with drones and missiles, killing multiple military leaders and leaving the country on the brink of a potential regime change.

Israel's operation came days before a sixth round of nuclear talks were scheduled between the U.S. and Iran. It sought to dismantle Iran's military and destabilize its political leadership, which Israel believes to have backed Hamas' October 7, 2023 attacks in Israel.

Trump reportedly knew about this plan for months, which included Israel covertly smuggling missiles and drones inside Iran.

The latest...

The order of operations in the Middle East sure has shifted quickly.

As of today, Israeli Prime Minister Benjamin Netanyahu says Israel's air force "controls the skies over Tehran," Iran's capital.

Today, the Wall Street Journal reported that Iran is willing to restart nuclear talks.

"They should talk, and they should talk immediately," Trump told reporters at a G7 meeting in Canada today (where headlines about tariffs and other foreign relations took a backseat). He also said: "I'd say Iran is not winning this war."

One of Trump's first phone calls following the attacks was apparently with Russian President Vladimir Putin, who says he could be a mediator in the conflict. "He feels, as do I, this war in Israel-Iran should end, to which I explained, his war should also end," Trump said, referring to the war in Ukraine.

It might feel like we're on the brink of World War III, or living through a form of it already, but the market is holding up.

After oil futures spiked by as much as 7% over the weekend, market jitters eased today on the news of "de-escalation" possibilities with Israel and Iran.

The benchmark S&P 500 Index moved about 1% higher and is within a few percentage points of its all-time high set in February... oil prices moved a little lower... gold shed 1%... and bitcoin has surged nearly 4% higher in the past 24 hours to near $109,000.

That's, in part, because a lot of this geopolitical conflict has already been known to the market. Trump said months ago that he was trying to squeeze Iranian oil exports and has clearly aligned U.S. interests with Saudi Arabia, Iran's rival in the region.

As we wrote on May 5, before Trump visited Saudi Arabia for meetings with Middle East leaders...

He says the White House is negotiating with Iran on a new nuclear deal... that any country buying oil from Iran won't be allowed to do business with the U.S... and that he wants the war in Ukraine to end.

That said, I (Corey McLaughlin) don't think this is the last surprise we'll see out of the Middle East or Ukraine (with the potential for oil supply and inflation shocks).

Stocks are up today due to cooling tempers in the Middle East. We'll see whether or not that lasts.

What else to watch this week...

The headline economic event of the week (for now) is the latest Federal Reserve meeting. The two-day event concludes on Wednesday with the central bank's latest policy announcement and a press conference by Fed Chair Jerome Powell.

The Fed will also publish its latest quarterly economic projections about GDP, inflation, and jobs. While its predictions almost always turn out wrong (even for the next three months), they tend to stoke market volatility in one way or another. You see, they show how Fed policymakers currently view the economy and give clues to the potential path of interest-rate policy.

This time around, the projected impacts of tariffs will be front and center, along with the pace of inflation, which has been cooling lately, and the future of Powell's job status. (Trump recently called him a "numbskull" for not lowering interest rates already.)

The market isn't expecting any policy moves from the Fed this week, so Wall Street will scrutinize what the Fed string-pullers indicate in their latest quarterly projections. Investors will also be looking for any insight into whether Powell plans to resign before his term ends next May.

As of today, federal-funds futures traders are 99.8% certain the central bank will hold its benchmark bank-lending-rate range right where it is between 4.25% and 4.5%. (Those are strong odds, even for these traders.) This same group thinks there's only a 12.5% probability of the Fed lowering rates at its following meeting at the end of July.

I don't expect the developments in the Middle East and the risk of higher oil prices to encourage the central bank to move away from its current policy this week, but there are a few things to keep an eye on this summer when it comes to the Fed...

One is that the market may be "surprised" by a slowing economy (perhaps tied to tariff-related activity, business nonactivity, or a weakening job market). If that happens, it's possible the Fed will lower rates sooner than currently expected.

But the Fed could also decide to hold rates higher for even longer, despite seeing the lowest pace of inflation in years. That would also surprise investors, since futures traders think there's a roughly 60% chance the Fed cuts rates by September.

So there's room for surprise no matter what happens at the Fed meeting this week.

Greg will be keeping a close eye on the market's reaction around this week's Fed meeting. As he wrote to subscribers this morning...

Given the better-than-expected inflation numbers of the past few months, it would make sense for the Fed to finally cut rates. However, if the Fed decides to keep rates where they are now, that could be a good thing for our trading strategy...

Warning: Volatility may be ahead...

Greg is preparing for volatility to pick up later this month or early July. It's his next important "time factor" to watch in his technical trading approach, which is rooted in market cycles that have proved to be important turning points over decades.

This volatility that Greg is anticipating could be tied to expectations about what the Fed will or won't do when it comes to interest-rate cuts, he says, or perhaps escalations in the Middle East. As he wrote...

We'll have to wait and see what happens. But all my research points in one direction...

Since mid-May, stocks and sectors across the board have been diverging, with some making new highs and others failing to do so. The Financial Select Sector SPDR Fund (XLF) is one such example of a failed breakout.

All of this tells us to expect more volatility ahead.

Now, this isn't to say it's time to go "all out" of stocks right now if you're a long-term investor. Greg says the divergences he sees – important sectors and stocks trading in opposite directions (up versus down) – may offer "some fantastic trading opportunities through the end of the summer."

But consider the analysis a warning to temper expectations if you think stocks are going to take off higher without interruption over the next month or so.