Global Financial Markets Confront the War in the Middle East and Amplification Risks
Global Financial Stability Report, April 2026
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- Published: April 14, 2026
Overview
- Publication: Global Financial Stability Report — April 2026.
- The global financial system is confronting the ongoing war in the Middle East, potential inflationary pressures, rising risks of further tightening in financial conditions, and several amplification channels that could lead from market turmoil to financial instability.
- Cross-border portfolio flows to emerging markets are largely intermediated by nonbank financial institutions and present both opportunities and risks, including heightened sensitivity to shifts in global risk sentiment.
Chapter 1 — Market developments and risks
- Financial markets are grappling with the ongoing war in the Middle East amid renewed inflationary pressures and rising risks of a sharper tightening in global financial conditions.
- Since late February, equity prices have fallen and bond yields have risen, reflecting higher energy prices and upward revisions to inflation and policy rate expectations.
- Emerging market assets—especially in commodity importing and more vulnerable economies—have been disproportionately affected.
- Market functioning has remained orderly, but risks are asymmetric and could intensify if the conflict persists.
Amplification channels that could transmit market stress into financial instability
- Elevated public debt and increased reliance on short-term issuance heighten rollover risks in core sovereign bond markets and could revive the sovereign–bank nexus.
- In emerging markets, carry trade unwinds and capital outflows may amplify currency pressures.
- High leverage among nonbank financial intermediaries, including hedge funds and leveraged exchange-traded funds, could exacerbate volatility through forced deleveraging and liquidity strains.
- In equity markets, stretched valuations and concentration—particularly in artificial intelligence related firms—raise downside risks.
- Although liquidity mismatches in private credit remain limited, rising borrower stress and growing retail exposure could test semiliquid structures.
- More frequent supply shocks have weakened the equity–bond hedging relationship, increasing the risk of simultaneous selloffs.
Policy recommendations and priorities for authorities
- Ensure liquidity and funding facilities are operationally ready.
- Monitor spillovers from actual inflation to inflation expectations.
- Strengthen central bank and supervisory governance.
- Enhance emerging market policy frameworks.
- Place public debt on sustainable paths.
- Complete Basel III implementation.
- Improve oversight of nonbanks.
- Strengthen cross-jurisdictional data sharing.
Chapter 2 — Capital flows to emerging markets and the role of global nonbank investors
- Since the global financial crisis, emerging markets have received substantial cross-border portfolio flows, largely intermediated by nonbank financial institutions.
- Such flows bring opportunities but also challenges, including heightened sensitivity to shifts in global risk sentiment, especially for countries with preexisting vulnerabilities such as high debt, low international reserves, or weak institutional quality.
- Among nonbanks, sensitivity to global risk varies significantly across investor types:
- Hedge funds and investment funds react more strongly to shifts in global risk than other nonbanks.
- Within the investment fund sector, passive mutual funds and exchange-traded funds show the greatest sensitivity.
- Countries that rely more on such risk-sensitive investors face tighter financial conditions during periods of global market stress, with adverse implications for macrofinancial stability.
- To reduce volatility in cross-border portfolio flows, countries—especially those reliant on more risk-sensitive investors—should:
- Strengthen macroeconomic fundamentals and institutional quality.
- Build robust fiscal and external buffers.
- Pursue proactive risk management consistent with the IMF’s Integrated Policy Framework.
- International cooperation is essential to close regulatory gaps, limit the propagation of shocks, and close data gaps.
- The rapid expansion of private credit markets and stablecoins in emerging markets warrants continued, proportionate monitoring.
Global Financial Stability Report — April 2026
Content in this bundle
- Chapter 1 Data
- Chapter 2 Data
- Capital Flows to Emerging Markets: The Role of Global Non-Bank Investors
- Chapter 1
- Chapter 1 Annex
- Chapter 2
- Chapter 2 Annex
- Chapter 2 Summary — Capital Flows to Emerging Markets: The Role of Global Nonbank Investors
- Executive Summary
- Foreword
- Full Report