The major US indices closed lower than their highs, as the market reacted to tensions from the US entering the Iran/Israeli conflict. Initial gains came from lower interest rates and hopes that recent bombings would lead Iran to negotiate. Comments from Fed’s Bowman, similar to those from Fed’s Waller, hinted at a possible rate cut in July if inflation stays stable. The chances of a July cut rose to 23%, while the likelihood of a September cut exceeded 80%. Iran’s decision to keep the Strait of Hormuz open suggested a move away from further conflict.

Iran’s Symbolic Counterattack

The markets rallied further when Iran’s attack on a US military base in Qatar was seen as mostly symbolic. Iran’s warning and intercepted missiles that caused no damage helped ease tensions. Final numbers showed the Dow increasing by 374.96 points, or 0.89%, reaching 42,581.78. The S&P index rose by 57.33 points, or 0.96%, to 6,025.17, and the NASDAQ climbed 183.56 points, or 0.94%, to 19,630.97. The S&P closed above its 100-hour moving average and tested the 200-hour moving average. The NASDAQ also finished above its 100-hour moving average. If both indices stay above these averages, we may see continued upward momentum. Recent sessions have shown a market dealing with ongoing uncertainties while holding onto technical support levels that provide short-term clarity. The response to global events—tempered yet revealing—suggests that traders anticipated escalation but faced something less disruptive, which helped stabilize sentiment as long as tensions don’t rise again. From our perspective, the late-session rebound shouldn’t be mistaken for a complete return of risk appetite. Prices were supported not by strong conviction but by a decrease in perceived geopolitical risk. This environment often leads to wider options pricing during the day, with futures becoming more sensitive to news and price movements becoming exaggerated around known technical levels. We saw this especially around the 100- and 200-hour moving averages, which influenced positioning, particularly in tech.

Fed’s Rate Narrative

Bowman’s remarks added more clarity to the interest rate narrative, confirming that as long as the upcoming CPI data remains stable, a July rate adjustment is possible. This subtle reinforcement can lead markets to respond to consistent messaging, especially when the overall policy direction feels unclear. Waller’s earlier comments laid the groundwork for this; the reiteration shifted probability models accordingly. Futures linked to the Fed funds rate are now reflecting this change clearly. Derivatives traders must balance technical levels with future volatility pricing. While spot indices may show momentum, this is partly due to seasonal lower volumes and hedges related to policy expectations. We should also consider the impact of variance sellers, who will now reevaluate their risk tolerance given ongoing unpredictability abroad. There’s renewed interest in downside protection that wasn’t visible two weeks ago. We’ve noticed new inflows into short-dated puts, especially in broader indices. This suggests that even though markets closed higher, the overall sentiment is more cautious than enthusiastic. Callable spreads and vertical structures are being adjusted mid-week more actively than usual. While the overall strength in equities suggests calm, the shift in volatility risk premium deserves attention. As long as implied volatility remains steady and realized volatility stays low, options market participants will price in stability—even if only temporarily. We’re observing areas where profit-taking has happened consistently this month. Short gamma exposure has increased near these levels, which if broken with volume, could lead to further gains in a chaotic manner. In this context, patience is crucial. The speed of response will shift from central banks back to traders. With the current trends in cross-asset correlations and the strength in large-cap growth stocks, it’s better to limit directional trades and focus on delta-neutral strategies for the short term. The data suggests it’s not the right time to chase gains, nor to back off without a proper trigger. In the coming days, we should watch calendar spreads around key expirations closely. Short volatility plays may be profitable, but only if executed with tight risk controls and a clear understanding of upcoming events. Create your live VT Markets account and start trading now.

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