Global economy holds steady, but markets are easily spooked

Investor calm persists, but any shift in sentiment could send markets tumbling with very little warning

- Natale Labia

An eerie calm has descended over markets.

Despite the geopolitical uncertainty that has been playing out over the past few weeks, with the grim escalation of war between Israel and Iran — and then the US entering the fray — before a fragile truce took hold this week, investors have refused to panic.

Last week, the World Bank slashed its prediction for global growth to 2.3% and for the US to 1.4%. It warned that if President Donald Trump's “Liberation Day” tariffs resume when the 90-day pause ends on 8 July, global trade could seize up in the second half of the year. Meanwhile, the Federal Reserve also sharply downgraded its US growth projection and raised its inflation forecast. Stagflation, the toxic combination of economic stagnation and stubborn inflation, is increasingly a possibility.

And yet investors have not blinked. Since the tariff announcement in early April, equity markets have rallied. The S&P 500 has surged 24% from its April lows and now hovers near record highs. And although 10-year US Treasury yields have climbed nearly a full percentage point since last autumn to 4.4%, they too have stabilised, despite worries over deteriorating US fiscal projections.