The unexpectedly strong May non-farm payrolls report triggered significant market declines, a reaction characterized by simultaneous drops in both risk and safe-haven assets alongside a surge in the U.S. dollar. This pattern is typical of liquidity stress and a flight to cash, with crowded trades such as the Philadelphia Semiconductor Index and South Korean equities showing particular sensitivity. Subsequent easing of tensions with Iran and a lower-than-expected CPI reading only partially alleviated this pressure.

While the market's sharp reaction to the jobs data had an element of chance, the reality of tight liquidity conditions in June is undeniable. Domestically, the central bank has been draining funds from the system, with a net withdrawal of 3.8 trillion yuan since March. This has pushed the DR007 rate up gradually from a low of 1.30% in May to 1.46%, barely above the reverse repo rate. Externally, the European Central Bank and the Bank of Japan have raised rates. Market anxiety is high regarding new Fed Chair Wash's inaugural policy meeting on June 18, following the strong jobs data and amid unresolved Iran tensions. Furthermore, major IPOs like SpaceX's listing could potentially drain market liquidity. When extreme crowding meets such liquidity tightness, such unusual and severe volatility becomes less surprising.

AI-Related Trades Are Extremely Crowded

As of June 13, the historical percentile for crowding in the Philadelphia Semiconductor Index, South Korean stocks, and the STAR 50 Index has exceeded 80%. The Nasdaq 100, even after recent pullbacks, remains near the 70th percentile. Leverage in U.S. and South Korean equities is at elevated levels, with margin balances hitting new highs. While crowding does not alter return characteristics, it amplifies sensitivity to unexpected volatility.

AI Trades Approach Another Testing Point

U.S. AI-related trading has historically followed a pattern of "two strong quarters, one weak quarter." Based on this rhythm, July could become a critical juncture, coinciding with the concentrated earnings reporting season for Q2. The market's focus will be on whether nearly depleted operating cash flows can continue to support the rapid growth in capital expenditures.

Multiple Potential Liquidity Headwinds in June

On a macro level, headwinds include domestic central bank fund withdrawals, rate hikes from the ECB and BOJ, the "debut" of new Fed Chair Wash amid Iran uncertainty and strong jobs data, and the potential for massive inventory restocking demand if Strait of Hormuz shipping resumes. On a micro level, the "behemoth" SpaceX listing on the Nasdaq is a factor. While these are known risks, under certain conditions they can act as catalysts for volatility.

Looking ahead, key questions are: How significant are June's liquidity headwinds? What will be the magnitude and duration of their impact? How can we monitor liquidity changes? Are there other potential events that could tighten liquidity? What are the implications for asset allocation?

The Global Central Bank Tightening Inflection Point

Among the world's four major central banks, the ECB has already hiked rates, and the BOJ is highly likely to do so in June. Recent tightening by these banks is a more visible sign of a global inflection point. The proportion of global central banks easing has fallen from 81% in October 2025 to 44%, while the proportion hiking has risen from 0% in December 2025 to 15%. It is fair to say the global central bank cycle has entered a tightening phase, with the previous two such inflection points occurring in late 2016 and early 2021.

In practice, however, the impact of even the ECB and BOJ is far less than that of the Federal Reserve.

The ECB hiked as expected in June, eliciting a muted market reaction. The BOJ is highly likely to hike in June, with significant carry trade exposure. Market attention on a BOJ hike is heightened due to the "bad memory" of the carry trade reversal and severe turmoil following its July 2024 rate hike. Under a baseline scenario, with the hike fully anticipated, the impact on carry trades is seen as manageable. However, the scale of yen carry trades is not small, warranting vigilance for unexpected shocks. A sharp decline in U.S. Treasury yields, potentially triggered by a significant de-escalation in Iran, could pressure these carry trades and even lead to liquidity tightening if economies sell Treasuries to replenish oil inventories.

Will the Fed Hike? Hiking Expectations Are Overly Pessimistic

The upcoming FOMC meeting concluding on June 18 features two key points: the policy debut of new Chair Wash and the Fed's assessment of current conditions, particularly via the dot plot and economic projections.

Wash's debut may involve advocating for "trimmed mean" inflation metrics to create policy flexibility, supporting balance sheet reduction but at a slow pace, and favoring a weaker role for forward guidance.

The bar for a Fed rate hike is high. While near-term rate cuts face difficulties due to strong economic data and shifting Fed official stances, the threshold for hiking is also elevated. Inflation may have already peaked. The high base effect from last year's tariffs should push CPI lower in the second half of the year unless oil prices surge rapidly. If oil prices fall back to $80-90 per barrel in Q3 and Q4, year-end CPI could drop below 3%, creating an opportunity for rate cuts.

Impact of Major IPOs: Record Market Cap, Manageable Fundraising

U.S. markets may see three major IPOs this year. SpaceX's listing set a record for market capitalization. However, its fundraising amount, while large, is relatively modest compared to the total market. Historical analysis of major IPOs suggests pressure often emerges in the 30 days before listing, particularly for peer companies, with post-listing impact being less significant.

The impact of "fast inclusion" in major indices is manageable. The Nasdaq 100 could include SpaceX as early as July 7. Based on ETF and mutual fund ownership data, the resulting passive fund outflow from other index constituents is estimated to be a manageable 0.02% of the Nasdaq 100's market cap. Inclusion in the S&P 500 would take at least 12 months.

Key future dates to monitor for SpaceX include potential Nasdaq 100 inclusion (~July 7), the first major lock-up expiration post-earnings (~late July), and the largest lock-up expiration (~late October).

How to Gauge Liquidity? Costs Are Low, Supply Is Ample

From a price perspective, various indicators—Treasury term spreads, SOFR-OIS spreads, commercial paper spreads, credit spreads, cross-currency basis swaps, and volatility indices (VIX, MOVE)—generally point to low funding costs and contained stress.

From a quantity perspective, bank reserves as a percentage of assets have declined to around 12%, near the edge of the "ample reserves" threshold. Overnight reverse repo usage has plummeted. Overall financial liquidity metrics remain broadly ample.

Asset Allocation Implications: Crowding Amplifies Volatility

Crowding itself does not change an asset's underlying trend; the industrial trend is key. However, crowding amplifies volatility, especially in response to liquidity shocks. The AI trade's cyclical pattern and the upcoming earnings season create a period of market uncertainty. In such an environment, sudden liquidity tightness can magnify price swings.

In the absence of a "full-blown bubble," a decline driven primarily by liquidity can help digest high expectations and crowding, representing a healthy correction that may offer better entry points. Operationally, managing position sizes is prudent when facing unpredictable volatility. For relative return investors, a strategy of "narrowing the focus" may be appropriate. From a sector rotation perspective, falling rates benefit assets sensitive to the discount rate, such as commodities and certain tech sectors. Long-term allocation should follow the direction of credit expansion, not merely chase laggards.