(The views expressed here are those of the author, an

investment strategist at Panmure Liberum.)

By Joachim Klement

LONDON, June 23 (Reuters) - Financial markets famously

hate uncertainty, but getting answers to many of the open

questions currently hanging over markets may end up offering

investors little comfort.

Several recent global developments, including President

Donald Trump's April 2 tariff announcement and subsequent 90-day

pause as well as the breakout of the Israel-Iran war, have

sparked some of the highest levels of uncertainty in decades.

If recent U.S. stock market performance is anything to go

by, investors seem convinced that everything will work out just

fine.

Investors will likely get more clarity on several of these

issues in the coming weeks, but they may find that this optimism

is unwarranted.

On July 9, the 90-day pause on Trump's Liberation Day

'reciprocal tariffs' will end, and unless the delay is extended

or multiple trade deals are struck, U.S. import tariffs will

essentially double from the 10% level today.

So far, only the UK has managed to agree on a trade deal,

and, even here, there is little clarity about the future of

tariffs on UK steel exports. Negotiations with the European

Union and Japan have stalled, and the EU has prepared a range of

potential retaliatory measures.

At the same time, the U.S. Commerce Department is preparing

to present its findings on investigations into semiconductors,

pharmaceuticals, copper, aircraft, jet engines and a host of

other goods. It is widely expected that once these findings are

presented, the U.S. government will act quickly to impose

additional tariffs or import restrictions.

Meanwhile, the Senate is expected to vote on the Trump

administration's budget bill in July. The Congressional Budget

Office has estimated that in its current form, this bill will

add $3.3 trillion in extra debt over the coming decade.

Investor confidence in the dollar and the safety of U.S.

Treasuries has been shaken recently, partly due to the country's

deteriorating fiscal outlook, so this deficit-expanding budget

will only add fuel to the fire.

And now, the war between Israel and Iran has been thrown

into the mix, with the U.S. attacking Iranian nuclear sites on

Sunday. Oil prices have increased by roughly 10% since the war

broke out, though the price as of June 20 was still in line with

the 2024 average. After the U.S. attacks, we could see Iranian

retaliation against oil fields in the Middle East or the

all-important Strait of Hormuz, which could drive oil prices

much higher.

WHAT REALLY MATTERS?

With all these moving parts, it is easy to lose sight of

what matters right now and what doesn't. While many actions,

such as the extension of the 2017 tax cuts in the budget bill,

will take years to unfold, the rise in tariff levels could have

an immediate impact.

The tariffs currently in place (e.g., base tariffs and

tariffs on steel, aluminium and autos) could add 0.9 percentage

points to U.S. inflation over the next 12 months, as importers

are forced to pass tariff costs on to consumers. If there are

no additional trade deals struck and tariffs revert to the

higher levels announced on Liberation Day, another 0.7

percentage points could be added. And that doesn't even include

potential tariffs on pharmaceuticals, semiconductors, and other

goods.

The inflation impact from the budget bill will likely be

much smaller at roughly 0.1 percentage points over the next 12

months, and an oil price spike to $80 per barrel is apt to have

roughly the same impact. Only if oil prices spike to about $100

and remain in that region for the next six months would we have

to be seriously worried about an inflation shock from the war in

the Middle East.

Of course, if all these developments, including a 20% oil

price spike, come to pass, U.S. inflation could rise from

current levels by up to two percentage points in the next twelve

months, dwarfing the likely impact on the UK and euro zone.

BLISSFUL IGNORANCE

Despite these concerning figures, U.S. equity investors seem

nonplussed. U.S. stock markets, perhaps banking on another TACO

moment, have rallied 15% above the level justified by

macroeconomic fundamentals, based on my estimates.

Over the last 10 years, a deviation of this size was

followed by an average decline of 7% in the S&P 500 in the

subsequent three months. The gap between performance and

fundamentals is smaller in the euro zone and UK, suggesting any

mean reversion would be less extreme there.

Now, it's possible that everything - from the trade war to

the real war - will end well. And stock markets have an uncanny

ability to ignore adversity for a long time.

However, if much of this uncertainty is resolved negatively,

resulting in either higher U.S. inflation or lower growth, U.S.

equities' surprising resilience is likely to be challenged.

(The views expressed here are those of Joachim Klement, an

investment strategist at Panmure Liberum, the UK's largest

independent investment bank).

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(Writing by Joachim Klement; Editing by Anna Szymanski)