Stocks meanwhile attempted to rally in the past week, with the Dow crossing back above 18,000 temporarily and the S&P 500 coming within range to take out its 2,132 all-time high. But stocks backed off toward the end of the week, as volatility increased, and European equities sold off hard. The dollar moved higher and oil and other commodities gave up gains. Gold was a standout, rising 2.7 percent. Sterling fell 1.7 percent against the dollar and the euro was down nearly a percent.
"I think you're in sort of the global growth fear mode again. This one may last longer because the Brexit vote is enough to keep those global growth fears alive, because if they [leave the EU], they may destabilize a region that's already struggling," said John Canally, economist and strategist at LPL Financial. A fear in the markets is that if the U.K. does choose to leave the euro zone, other countries will follow, destabilizing economies and bringing the demise of the euro.
The S&P 500 was down just 0.1 percent on the week at 2,096. The Dow ended with a slight gain of 0.3 percent at 17,865, and the Nasdaq was down 0.9 percent at 4,894. Strong gains in West Texas Intermediate crude futures helped lift stocks early in the week, but oil gave up most gains, with futures ending at $49.07, up just 0.8 percent on the week.
"We would not be surprised to see a 5 to 10 percent [stock market] pullback in the next couple weeks, maybe ahead of the Brexit vote," said Canally. A new poll from the
Independentnewspaper showed Brexit gaining some momentum, with 55 percent now believing the U.K. should leave the EU. That poll sent jitters through markets when it was released Friday afternoon.
"It's going to handcuff people until that vote comes out. It's a binary event," said Peter Boockvar, chief strategist at The Lindsey Group. "It's in the context of a global market where everybody is worried about growth here."
The action in global bond markets is also likely to get attention, as investors focus on falling yields in a world that already has more than $10 trillion in negatively yielding debt.
"Low yields convey a sense of pessimism about the outlook for the economy and inflation, and it creates worry. This is why markets clearly indicate that they oppose negative policy rates," said Tony Crescenzi, strategist and portfolio manager at Pimco. "It's the optics of it." Crescenzi said he's seeing a rush of investors from Asia and Europe moving into U.S. Treasurys and corporate credit, a trend he expects to continue.
Crescenzi said while Brexit has been a concern in markets, he sees a less than 50 percent chance the U.K. would exit the EU. "If it does occur, because it will be long and drawn out, the markets will probably overreact and present an opportunity for people who have dry powder," he said. He said the concern is not so much for the longer term but there could be volatility initially.
"Just broadly what the market is worried about and what's driving yields lower is this feeling of monetary policy exhausting itself, and its influence on economies and markets," said Crescenzi. "The market is near its high, and the nervousness isn't that acute. It's just the concern that economies are running at around stall speed, and it wouldn't take much to break them. A modest slowing could put economies into a growth recession or actual recession. Markets are seeing that liquidity isn't what it used to be, and if some change arises in the economic environment, it will be a rush to the exit all at once."
The move toward lower yields also accelerated when May's weak jobs report changed expectations that the Fed could hike rates this summer. Crescenzi said the Fed will not change its rate hiking posture in its statement Wednesday, or even its forecast for two rate hikes this year. But the fact that there were only 38,000 nonfarm payrolls may result in a change of its language on the economy and labor market.
Crescenzi said investors should be cautious, favoring higher grade bonds. He said he believes conditions in markets and economies are stable but not necessarily secure. "There's not a great fear about interest rate risk because of the great support that's provided by the central banks," he said.
Adrian Helfert, head of global fixed income at Amundi Smith Breeden, said the issue now is whether the central bank easing will really lift economies. He said it will be difficult for the Fed to raise rates in July. "They're actively worried about the U.S. economy and making sure this doesn't indicate a turn in the U.S. economy," he said.
"We know they're more than they used to be the global central bank. They have to realize a stronger dollar may be what we have to endure to allow other central banks to reflate their economies. I think they realize they have to come out and push data dependency," said Helfert. He said the Fed may not be in a hurry to raise rates but it will remain on a hiking path.
"I think the Fed is extraordinarily accommodative, and they've shown their innovation on the monetary policy side. They're not going to raise rates just to have bullets in their gun. I would argue against that," he said.
Data in the coming week includes retail sales Tuesday, industrial production Wednesday and CPI on Thursday. There is also possible Chinese loan data and industrial data expected over the weekend.
Traders will also fixate on market behavior next week.
"We'll probably have a weak week [for stocks] with the exception of a brief time frame after [Fed Chair] Janet Yellen talks Wednesday, because she has a good track record of making the market go up," said Randy Frederick, Charles Schwab managing director, trading and derivatives. "I don't see any upside momentum, but I don't see huge downside risk. I keep thinking we're going to see the record highs. We got pretty close but I don't think that's going to happen next week."
Steve Massocca, managing director at Wedbush Securities, said the easy central bank policies will act as a floor for the stock market though it is stuck in a range. "The market is going to be in a trading range. It's stopped by valuation at this level, and it's helped by incredible monetary policy at lower levels," he said. "There's probably not going to be a change in aggressive monetary policy, so going back to early 2015, the market's pretty much been in the same valuation range. We're at the high end of the range. I'm not saying the market's going to roll over and go back to where it was in early 2016."
He did say the S&P could trade back down to 2,050 or lower. "We could easily see 2,000, but I don't see it getting to 2,200," he said.
What to watch:
FOMC meeting begins
6 a.m. NFIB survey
8:30 a.m. Retail sales
8:30 a.m. Import prices
10 a.m. Business inventories
8:30 a.m. PPI May
8:30 a.m. Empire State survey
9:15 a.m. Industrial production
2 p.m. FOMC statement and projections
2:30 p.m. Fed Chair Janet Yellen press briefing
4 p.m. TIC data
8:30 a.m. Initial claims
8:30 a.m. CPI
8:30 a.m. Philadelphia Fed survey
8:30 a.m. Current account
10 a.m. NAHB survey
8:30 a.m. Housing starts
8:30 a.m. Building permits