Why do global markets take such an emollient view of the economic consequences of Donald Trump? This week he re‑escalated the conflict around the world’s most critical chokepoint in the Strait of Hormuz, highlighting his ability to make the global economy more vulnerable to supply shocks and potential stagflation. The prospects for a durable US‑Iran peace are now depressingly remote.

Trump’s tariff wars and weaponisation of trade and finance continue to unwind the immense efficiencies of globalisation, raising uncertainty to unprecedented levels. Yet the IMF projects global growth of 3.0 % in 2026 and 3.4 % in 2027, and effective tariff rates proved lower than feared. Meanwhile the AI investment boom in the US fuels market euphoria comparable to historic manias.

Against this backdrop, monetary and fiscal policy remain unusually loose: the Federal Reserve has missed its inflation target for years, the budget deficit runs at 6 per cent of GDP, and public debt is at post‑WWII highs. The Bank for International Settlements warns that the current AI boom resembles past bubbles that ended in recession. Long‑term Treasury yields have crept up since Covid, but do not fully price inflationary risks.

With US policy at full tilt and financial conditions easy, a market seizure is not imminent, but the patience of bond markets will wear thin. John Plender predicts the crunch will arrive within 12 months.