Bobby Charmak works on the floor at the New York Stock Exchange in New York. AP
The IMF report said the global financial system is under renewed pressure from geopolitical tensions, rising energy prices, and higher inflation expectations, with risks increasingly tilted to the downside as markets adjust to a prolonged conflict.
Since late February, global equity markets have fallen by around eight percent, reversing earlier gains driven by strong corporate earnings, while sovereign bond yields have risen sharply on expectations of higher inflation and tighter monetary policy.
Emerging market assets have been particularly affected, weighed down by a stronger US dollar and rising commodity prices, especially in energy-importing economies.
Inflation expectations have also risen slightly, with market-based measures increasing by 0.3 to 0.8 percent over two years in several advanced and emerging economies, reflecting higher energy costs.
While markets have so far functioned in an orderly manner, the IMF stressed that risks are becoming increasingly asymmetric. The longer the conflict persists, the greater the likelihood that global financial conditions, already tighter than in the post-pandemic period, could deteriorate further and more abruptly.
The report highlighted several amplification channels that could transmit market stress into broader financial instability. These include rising sovereign debt levels and rollover risks in core bond markets, which could intensify yield volatility and tighten funding conditions.
This could also revive concerns about the link between governments and banks, where losses on government bonds could weaken banks’ balance sheets at a time when governments have limited fiscal space.
Emerging markets face additional risks from potential capital outflows and currency pressures as carry trades unwind, and terms of trade deteriorate.
The IMF noted that non-bank financial institutions, including leveraged funds and exchange-traded products, could further amplify volatility through forced selling and margin calls during periods of stress.
Cross-border portfolio flows into emerging markets have reached record levels in recent years, approaching $4 trillion in 2025, but the fund warned that these flows have become increasingly sensitive to shifts in global risk sentiment.
The IMF also pointed to growing vulnerabilities in private credit markets, rising leverage among non-bank financial intermediaries, and increased correlations between equities and bonds, which reduce diversification benefits and heighten the risk of simultaneous sell-offs.
Despite the growing risks, the IMF said liquidity conditions remain broadly stable for now. However, it cautioned that prolonged geopolitical tensions could quickly expose underlying fragilities.
It called on policymakers to ensure the readiness of liquidity and funding facilities, strengthen central bank swap lines, and maintain credible monetary policy frameworks.
It also urged emerging economies to reinforce fiscal discipline, enhance foreign exchange flexibility where appropriate, and strengthen oversight of non-bank financial institutions.
The fund concluded that decisive and coordinated policy action will be essential to prevent market turbulence from evolving into broader financial instability amid an already fragile global environment.
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