It should be clear to any investor by now that something profound has changed in global markets since the beginning of the year. While phrases such as “a new paradigm” and “regime shift” are bandied about, a far simpler explanation for the dramatic declines in asset prices is pervasive uncertainty. At the start of the year, the overriding concern was persistently high inflation, exacerbated by the commodity shock stemming from Russia’s invasion of Ukraine and the renewed disruptions to global supply chains caused by extended lockdowns in China. By early May, the panic over inflation had given way to mounting fears about a major slowdown, and quite possibly a full-blown recession . Having fallen behind the curve in controlling prices, leading central banks, in particular the US Federal Reserve, pivoted rapidly towards aggressive tightening , increasing the scope for a steep downturn. Yet, no sooner did the market narrative shift to the risk of a recession than the inflation scare took hold again. The publication of data last Friday showing that prices in the US hit a fresh 40-year high of 8.6 per cent year on year last month has convinced investors that the stark choice facing policymakers is between losing control of inflation and severely damaging the economy. To be sure, a soft landing – a policy-induced slowdown that averts a recession – is still possible, provided inflation peaks in the coming months and interest rates do not rise sharply enough to cause economic activity to contract. However, not only are persistently high prices just as menacing as a severe downturn, the ability of central banks and governments to respond effectively to these twin threats is being called into question. At the heart of the brutal sell-off in markets over the past two months is a crisis of confidence in global policymaking. In China, the protracted citywide lockdown of Shanghai, the nation’s financial hub and most populous city, dealt a severe blow to the credibility of Chinese policymaking, which had already been damaged by earlier failures to follow through on pledges to stabilise markets and support growth. In a report published on June 13, Nomura said China had entered a “Covid Business Cycle” driven by the government’s zero-tolerance approach to the virus and the recent shift towards looser monetary and fiscal policy . The problem is that stimulus loses its potency when lockdowns are in place, and the risk of further shutdowns looms. Although markets are more concerned about daily caseloads than the zero-Covid policy itself, the recent improvement in sentiment towards China is dangerously dependent on a mass testing campaign to keep the virus at bay, especially in Shanghai and Beijing. Deploying stimulus in the face of such uncertainty looks like mission impossible. In the US, panic has gripped the all-important Treasury bond market as the Fed appears even further behind the curve than previously assumed. The probability that inflation will be higher for longer is fanning fears about an ultra-hawkish Fed tightening into a rapidly slowing economy. In a sign of the extent of the worries about US monetary policy, Treasury yields have been more volatile than notoriously turbulent bitcoin over the past several days. Part of the reason for this is gnawing concerns that higher rates will depress growth without stamping out inflation. The Fed itself, which hiked rates on Wednesday by a massive 75 basis points, admits it can do little to suppress price pressures that stem mainly from supply chain disruptions and the war-induced commodity shock. The monetary cure, if administered aggressively, could end up being worse than the disease. In Europe, the risk of a policy mistake is even more acute. The European Central Bank is caught between a rock and a hard place. While it is under intense pressure to end its eight-year experiment with negative rates in response to a surge in inflation to 8.1 per cent, the prospect of tighter policy has already caused the bloc’s bond markets to fragment, reviving fears of another euro-zone debt crisis. The elephant in the room is Italy, where the 10-year yield has shot up to its highest level since 2014 and is more than two percentage points higher than the benchmark German yield. The more determined the ECB is to normalise policy, the more difficult it becomes to keep the euro zone intact. In Japan, persistently ultra-loose policy has its own set of problems. The yen’s dramatic decline to a 24-year low against the US dollar has amplified food and energy price shocks that have driven inflation to a whisker above the Bank of Japan’s once-elusive 2 per cent target. Not only do bond investors no longer believe the BOJ can keep yields pinned down just above zero, soaring food and energy costs have sparked a backlash against policymakers. Despite having finally met his inflation target, BOJ governor Haruhiko Kuroda is ending his term in office still struggling to break Japan’s deflationary mindset. When the policy responses themselves are ineffective, exacerbating vulnerabilities in the global economy, it is hardly surprising that uncertainty and confusion pervade markets. Confidence in policymaking is at its lowest ebb yet. Nicholas Spiro is a partner at Lauressa Advisory