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IMF warns global financial markets underestimate geopolitical risks
(MENAFN) The International Monetary Fund (IMF) cautioned in its latest report that global financial markets may be overly optimistic about rising geopolitical risks, even as near-term financial risks appear to be under control. The IMF warned that markets could be underestimating the potential consequences of growing military conflicts and upcoming elections.
The report raised concerns that easing monetary policy could contribute to asset price bubbles and decrease market sensitivity to geopolitical and economic risks. The IMF's semi-annual Global Financial Stability Report highlighted the “widening gap” between rising geopolitical uncertainty and declining market volatility, which increases the likelihood of market shocks, like the one in August when the Bank of Japan’s interest rate hike led to a major sell-off of debt.
The IMF noted that while credit and equity markets are buoyant, they are reacting poorly to slowing earnings growth and the ongoing struggles in vulnerable sectors such as corporate and commercial real estate. Despite the apparent stability, these sectors continue to deteriorate, indicating that the financial markets may not be as robust as they seem.
Moreover, the IMF emphasized that while monetary easing by central banks has created more "favorable" financial conditions with lower interest rates, it has also led to higher asset valuations, increased debt levels, and rising non-bank leverage. The report warned that this growing imbalance could amplify negative shocks, which have become more likely given the increasing geopolitical and economic uncertainty, especially with ongoing military conflicts and the unpredictable policies of newly elected governments.
The report raised concerns that easing monetary policy could contribute to asset price bubbles and decrease market sensitivity to geopolitical and economic risks. The IMF's semi-annual Global Financial Stability Report highlighted the “widening gap” between rising geopolitical uncertainty and declining market volatility, which increases the likelihood of market shocks, like the one in August when the Bank of Japan’s interest rate hike led to a major sell-off of debt.
The IMF noted that while credit and equity markets are buoyant, they are reacting poorly to slowing earnings growth and the ongoing struggles in vulnerable sectors such as corporate and commercial real estate. Despite the apparent stability, these sectors continue to deteriorate, indicating that the financial markets may not be as robust as they seem.
Moreover, the IMF emphasized that while monetary easing by central banks has created more "favorable" financial conditions with lower interest rates, it has also led to higher asset valuations, increased debt levels, and rising non-bank leverage. The report warned that this growing imbalance could amplify negative shocks, which have become more likely given the increasing geopolitical and economic uncertainty, especially with ongoing military conflicts and the unpredictable policies of newly elected governments.
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