09/01/2025

To date, 2025 has been marked by a series of economic and political shocks that have done little to unsettle the financial markets. The picture is one of a global economy subject to sudden shocks, where abrupt changes in trade, fiscal, and monetary policy generate sharp swings in macroeconomic dynamics and confidence. Despite this, stock markets remain close to historic highs and implied volatility has fallen to its lowest levels in recent years. The apparent disconnect between the instability of the environment and the calmness of the markets is, for now, the central paradox of the moment.

In the case of the United States, the growth dynamics clearly illustrate how trade policy can alter figures from one quarter to the next without any fundamental change in the trend. During the first quarter, the advance payment of imports to avoid new tariffs caused a deterioration in the external balance, dragging GDP down to a 0.5% quarterly annualized contraction. But the outlook changed completely in the second quarter: imports declined, exports rebounded, and the external balance turned positive, driving growth of 3.3%. For the rest of the world, and particularly for major exporters to the United States, the effect was the opposite: first, they enjoyed an acceleration thanks to the pull of American demand, and then suffered a correction when those purchases faded. This fluctuation has been reflected in both consumer and business confidence indicators, which fluctuate depending on expectations about the direction of trade policy. The outlook remains open, with strategic sectors such as semiconductors and pharmaceuticals still subject to potential new rounds of tariffs, while cross-border threats remain in the digital services and technology sectors.

At the same time, the Federal Reserve is under unprecedented pressure. The attempted removal of one of its governors has sparked a legal dispute that could redefine the limits of the central bank's autonomy. The risk is that it opens the door to subordinating monetary policy to the immediate interests of the executive branch, in a context where the sustainability of public debt has become an explicit argument for demanding aggressive interest rate cuts. The deficit is projected to exceed 6% of GDP, and interest costs continue to rise, fueling the temptation to use the Fed as a tool to lower Treasury financing costs.

For the moment, the markets do not seem worried. The S&P 500 index is nearing all-time highs, implied volatility remains at yearly lows, and corporate risk premiums remain contained. Only the long end of the US yield curve offers a sign of concern: 30-year yields have rallied sharply, anticipating that fiscal imbalances and institutional erosion could have longer-term consequences. However, as long as companies continue to post solid profits and inflation remains under control, investors show a surprising willingness to ignore structural risks. Even the perception that the Fed may lose independence translates, for some, into a greater likelihood of rate cuts, which ends up reinforcing the attractiveness of equities in the short term.

In Europe, attention is focused on France, where the government is facing a vote of no confidence that looks likely to lead to its downfall and usher in a period of political instability. This situation occurs in parallel with more muted macroeconomic data, with domestic demand showing weakness and inflation stabilizing near the central bank's target. Across the Channel, the United Kingdom remains trapped between persistent inflation and modest growth, raising concerns about the Bank of England's decisions.

In short, the financial world finds itself in a paradoxical situation: markets appear immune to political and fiscal tensions that, under normal circumstances, would have generated a greater degree of concern. The current balance is supported by corporate profits and the expectation of rate cuts, but it is not without risks. Fall will bring tough tests: the evolution of labor data, political stability in Europe, and the possibility of new rounds of tariffs could break the current calm and reintroduce volatility into the market.
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