The International Monetary Fund has issued a stern directive to global financial authorities to take decisive action to “prevent global financial contagion”, as the ongoing war in the Middle East creates a volatile environment of inflationary pressures and heightening systemic risks.
In its April 2026 Global Financial Stability Report, released on Tuesday, the IMF highlighted that while market functioning has remained orderly thus far, several “amplification channels” are now primed to transmit market stress into broader financial instability if left unchecked.
“Policymakers should act decisively to strengthen resilience,” the report stated, emphasising that the window for preventive action is narrowing as geopolitical tensions test the limits of global market resilience.
According to the IMF, the conflict has already begun to reshape market dynamics, with equity prices falling and bond yields rising since late February. The fund noted that this shift reflects a combination of higher energy prices and upward revisions to inflation expectations, which could force a sharper tightening of global financial conditions.
“Emerging market assets, especially in commodity-importing and more vulnerable economies, have been disproportionately affected,” the IMF observed, warning that these nations are facing heightened sensitivity to shifts in global risk sentiment.
The report identified a “sovereign–bank nexus” fuelled by elevated public debt and a reliance on short-term debt issuance as a primary risk factor. It further warned that high leverage among nonbank financial intermediaries, including hedge funds and leveraged exchange-traded funds, could exacerbate volatility through forced deleveraging.
“Carry trade unwinds and capital outflows may amplify currency pressures,” the report noted regarding the specific risks facing emerging markets.
The IMF also turned its lens toward equity markets, pointing out that “stretched valuations and concentration, particularly in artificial intelligence-related firms, raise downside risks.” This concentration, combined with more frequent supply shocks, has weakened the traditional equity-bond hedging relationship, increasing the possibility of simultaneous selloffs across asset classes.
To mitigate these risks, the Fund called for a multi-pronged policy approach, including the completion of Basel III implementation and improved oversight of the nonbank sector.
“Priorities include ensuring liquidity and funding facilities are operationally ready and monitoring spillovers from actual inflation to inflation expectations,” the Fund advised.
The report concluded by urging international cooperation to close regulatory and data gaps, particularly in the rapidly expanding private credit and stablecoin markets, which the IMF says warrant “continued, proportionate monitoring” to ensure they do not become the next flashpoint for global instability.
