Markets are on high alert as three major economies—the U.S., China, and Japan—grapple with conditions that could reignite stagflation.
In recent months, financial markets have exhibited heightened volatility, with sharp sell-offs leaving a trail of uncertainty. The sources of this turmoil are numerous, with two of the most widely discussed being the new tariffs imposed by the U.S. administration and the so-called DOGE, referring to cuts in discretionary federal spending.
In such a turbulent environment, the greatest concern is not necessarily what is already known, but rather what could unexpectedly break. The fear of a systemic shock—a sudden rupture capable of triggering a domino effect across global markets—looms large. History has shown that financial crises, while often unpredictable, can be devastating, as demonstrated by those few who foresaw the financial crisis of 2008.
Without engaging in mere speculation, we can still identify certain structural weaknesses that, if pushed beyond a critical threshold, could evolve into full-blown crises. Currently, investors are closely watching three key risks that could serve as potential epicenters of market instability.
1. A Return to 1970s-Style Stagflation
One of the most feared scenarios is a resurgence of stagflation—the toxic combination of weak growth and persistent inflation. The 1970s saw a prolonged period of economic uncertainty and soaring interest rates, driven by a mix of policy missteps, oil shocks, and fiscal imbalances.
As we enter 2025, several indicators are stirring similar concerns. U.S. interest rates remain in the 4.25% to 4.5% range, while GDP growth forecasts have been downgraded to 1.7%. At the same time, inflation expectations have risen to 2.8%.
The Federal Reserve has signaled two potential rate cuts, but it has also made it clear that any monetary easing will be contingent on inflation returning to its 2% target. If price pressures persist, the Fed may be forced to maintain its tightening stance, even at the risk of further slowing the economy.
While today’s situation is not as extreme as that of the 1970s, key economic dynamics bear worrisome similarities. One critical variable to monitor is the oil price, which could reignite inflationary pressures. Geopolitical factors—including the ongoing war in Ukraine, escalating tensions between Iran and Israel, and policy moves by OPEC—could further complicate the inflation outlook.
2. China and the Return of Global Inflation
A second potential flashpoint is China. After years of acting as a deflationary force on the global economy, Beijing appears to have shifted course. The Chinese government has rolled out large-scale fiscal stimulus measures, while the central bank has adopted a more expansionary monetary policy.
These efforts to boost domestic demand could have unintended consequences—particularly on commodity prices. If China’s economy reaccelerates, the resulting demand surge could fuel global inflation, complicating the Federal Reserve’s efforts to tame price pressures.
Meanwhile, Europe is also pivoting toward expansionary policies. Germany has unveiled a €500 billion infrastructure investment plan, and other European nations may follow suit. This combination of fiscal stimulus and monetary easing poses the risk of overheating the global economy at precisely the moment when central banks are trying to cool it down.
3. The Risk from Japan: Unwinding the Carry Trade
The third risk factor stems from Japan, a market often overlooked but crucial to global financial stability. For years, investors have taken advantage of ultra-low Japanese interest rates to borrow in yen and invest in higher-yielding assets such as U.S. equities and bonds—a strategy known as the carry trade.
However, this dynamic is shifting. Yields on Japanese government bonds are rising, and Japanese inflation has remained above 3%, fueling speculation that the Bank of Japan may soon implement a rate hike. A stronger yen would increase the cost of carry trades, potentially leading to unwinding of leveraged positions across global markets.
Recent market trends have shown a growing correlation between yen appreciation and declines in the S&P 500. If this pattern intensifies, it could trigger widespread deleveraging, amplifying market stress worldwide.
Are These Risks Imminent?
While none of these scenarios are inevitable, current economic trends suggest they are becoming more plausible. While investors are already factoring in U.S. tariffs and fiscal policy shifts, deeper systemic vulnerabilities may pose the greatest threats.
Each of these risks—stagflation, China’s inflationary push, and the unwinding of Japan’s carry trade—represents a potential fracture point that could escalate into a broader crisis. And as is often said in global finance, “no market is an island.”
Original article published on Money.it Italy 2025-03-28 07:52:00. Original title: 3 scenari disastrosi che spaventano le borse oggi
