Good vibes fade, risk takes a breather, and war drums echo in the background

What began as a feel-good session fueled by soft U.S. CPI and news of a U.S.–China trade “framework” ended with risk appetite being dragged into the war bunker. The so-called trade breakthrough was enough to keep bulls nibbling in early trade, but geopolitical noise out of the Middle East turned that sugar high into heartburn by the close.

Wall Street’s gains were modest yet short-lived. The S&P 500 snapped a three-day win streak, falling 0.3%, while oil ripped higher after the U.S. ordered evacuations in Iraq and signalled it’s on high alert for a potential Israeli strike on Iran. With the Pentagon green-lighting the departure of military families across the region and Trump admitting he's “less confident” about an Iran deal, the market smells more smoke than resolution.

And just like that, trade optimism got drowned out by the distant—yet—familiar sound of war drums.

Back to the “deal”: it’s inked in spirit, not signatures. China lifts its export restrictions on rare earths; the U.S. caps tariffs at 55%, while China caps them at 10%. Trump was all smiles, Commerce Secretary Lutnick promised a string of follow-up deals, and Treasury’s Bessent chimed in about good-faith tariff pauses. But judging by the muted market reaction, traders are treating this one like an old earnings beat from a structurally broken company—nice headline, no follow-through.

The irony, of course, is that the U.S. is now calling on Beijing to be a “reliable partner” after years of slapdash tariff whiplash. Glass houses, meet stones.

Still, there is a silver lining. Based on the current tariff calculus, the U.S. effective tariff rate is likely to land closer to 15%—well below worst-case scenarios, but still the highest since the Smoot-Hawley Act. For now, inflation hasn’t flinched. May’s CPI showed a cooler core reading, giving Treasuries the green light to rally and pushing two-year yields below 4%. The 10-year closed under 4.42% after a strong $39B auction, and bond bulls finally got something to cheer about.

The soft CPI print added fuel to calls for Fed rate cuts, but let’s be clear—the Fed isn’t jumping. Not yet. It’ll take more than one print to convince Powell that tariff-driven inflation won’t show up later this year. Meanwhile, Trump and VP Vance are turning up the political heat, accusing the Fed of “monetary malpractice” for not cutting fast enough. Expect that rhetoric to escalate the longer the Fed sits on its hands and stocks struggle to beat recent highs.

The dollar, curiously, isn’t at all acting like the safe-haven it once was. Even with oil surging and Middle East tensions climbing, the greenback is trading like a wounded prizefighter. The DXY hovers near 2023 lows, with the euro delivering the latest uppercuts thanks to a newfound hawkish ECB and a Fed that might be forced to cut rates.

Asian equity futures suggest a cautious open. US futures are flat, Oracle's after-hours pop may add some tech support, but the bar is now materially higher for a breakout. Bulls need more than soft CPI and half-baked trade deals—they need concrete trade deals or at least a summer smoke signal from the Fed.

Technically, we’re bumping up against recent highs. Traders are starting to stare into the mirror and wonder if momentum alone can break the ceiling. Without fresh catalysts, the breakout trade feels like pushing a string.

Under the hood, option flows are starting to hum. Mega-size SPX downside has been bought in size out to August and September via put spreads, while VIX downside saw chunky flows overnight—textbook tail hedge positioning. That’s not fear—it’s preparation.

In short, the market wants to believe the rally wagon signage, stimulus, and dovish pivots—but geopolitics, trade noise, and a still-hawkish Fed are clouding the view.

The mood is shifting. The punchbowl's still out, but the music just got a little darker.