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Global Financial Stability Report
Global Financial Markets Confront the War in the Middle East and Amplification Risks
April 2026
Global financial stability risks are elevated. 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, largely intermediated by nonbank financial institutions, offer important opportunities but also carry risks, including heightened sensitivity to shifts in global risk sentiment.
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. While market functioning has remained orderly, risks are asymmetric and could intensify if the conflict persists.
Several amplification channels could transmit market stress into broader 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 also weakened the equity–bond hedging relationship, increasing the risk of simultaneous selloffs.
Policymakers should act decisively to strengthen resilience. Priorities include ensuring liquidity and funding facilities are operationally ready; monitoring spillovers from actual inflation to inflation expectations; strengthening central bank and supervisory governance; enhancing emerging market policy frameworks; placing public debt on sustainable paths; completing Basel III implementation; improving oversight of nonbanks; and strengthening cross-jurisdictional data sharing.
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 to emerging market economies, such as 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, the 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, with passive mutual funds and exchange-traded funds showing the greatest sensitivity within the investment fund sector. Countries that tend to 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, and 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.
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