By Jules Rimmer
With thin liquidity and lots of market players absent, the third quarter can often be accompanied by market turmoil.
Historically, the summer months tend to witness the sharpest spikes in volatility and since the global financial crisis there have been multiple incidents of severe market disruption at this time of year. A note published by Deutsche Bank strategist Henry Allen investigates the possibility of another market shock in 2025.
Examples of previous summer crises, or at least third quarter, are legion: in 2024, the sudden unwind of the yen-carry trade trade triggered a major sell-off around the world and VIX VIX touched 65; in 2022, Fed chair Jerome Powell gave a hawkish speech and the Fed made their third consecutive 75 basis point hike to ward off inflation; 2015’s upheaval was sparked by a 43% slump in China’s benchmark Shanghai Composite CN:SHCOMP and fears of a Greek exit from the eurozone provoked chaos across European bourses; the global financial crisis of 2008 was catalyzed by Lehman’s bankruptcy, and the prequel to this crash was the bank run on Northern Rock and BNP Paribas’ freeze on funds owing to the subprime mortgage emergency in the summer of 2007.
Deutsche Bank’s Allen posted the most likely cause of a calamity this summer.
Chief among them, unsurprisingly, is the threat of trade war escalation. Trump has set another deadline now of Aug. 1 for the imposition of punitive tariffs on trading partners but markets have become accustomed to offers of compromise and worst-case scenarios being averted. This may not necessarily be the case this time given the policy unpredictability.
Allen also identifies the potential for inflation to start trending higher owing to the lagging impact of the tariffs already set. Bond and stock markets are discounting several Fed rate cuts in the second half of 2025 and malign CPI releases could price those out. On the flipside, weak economic data could also upset market sentiment and reawaken recessionary concerns.
Another source of developing tension is the fiscal dilemma facing not just the U.S. but several other G10 governments. Already this year, rising term risk premia – the extra return sought by investors for longer-duration instruments – has forced long bond yields higher in the U.S. BX:TMUBMUSD30Y , Japan BX:TMBMKJP-30Y and the U.K. BX:TMBMKGB-30Y Rising yields provide an immediate transmission mechanism for worries about funding high deficits.
Geopolitics have been a constant preoccupation of markets since Russia invaded Ukraine in 2022 and their propensity to upset markets has been demonstrated by adverse reactions to conflicts in the Middle East and the sub-continent. Geopolitics are a major source of volatility at present and any number of conflicts threaten to erupt into something calamitous.
While none of the shocks to which markets have been subjected this year has seriously derailed risky assets, this has been in part because of the ability of policymakers to adapt and create an adequate response. Something from left field that can’t be addressed so easily is the unknown, unquantifiable threat.
-Jules Rimmer
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07-08-25 0812ET
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