The IMF warns of the risk of a "disorderly" correction in global markets

The warning from the International Monetary Fund (IMF) comes amid escalating trade tensions between China and the United States. This follows statements made by U.S. President Donald Trump on Friday, threatening a "massive increase" in tariffs on Chinese imports. Despite these tensions, financial markets have shown resilience since April, when hostilities began, buoyed by expectations of monetary easing in most major economies. However, this optimism conceals potential damage from tariffs and high levels of public debt. The IMF cautioned that close ties between banks and less-regulated financial firms could amplify these risks. "Under a calm surface, the ground is shifting in several parts of the financial system, creating vulnerabilities," the institution noted in its semiannual report on global financial stability. "Valuation models indicate that prices of risky assets are well above fundamentals, increasing the likelihood of disorderly corrections in the event of adverse shocks," the IMF added. The IMF also highlighted the risk of a "sudden and brutal correction." Despite some negative economic data, valuations of stocks and corporate credit remain "quite stretched," driven by enthusiasm for large-cap companies in the AI sector, leading to historic concentration. This creates a risk of a sharp correction if expected returns do not justify high valuations. Analysis of bond markets reveals increasing pressure on market functioning due to worsening budget deficits. Sudden increases in yields could weigh on bank balance sheets and put pressure on open-end funds, such as mutual funds, the IMF explained. Central banks must remain vigilant regarding inflation risks linked to tariffs and adopt a cautious approach to monetary easing to minimize new surges in risky asset valuations, the IMF added. The independence of central banks is "essential" to anchor market expectations and enable these institutions to fulfill their mandates, the IMF emphasized, without referring to any specific institution. The IMF also pointed out that the non-bank financial sector, which includes insurers, pension funds, and hedge funds, continues to grow and now holds about half of global financial assets. In the U.S. and Europe, many banks have non-bank exposures that exceed their high-quality capital capable of absorbing losses. "The vulnerabilities of the non-bank sector are interdependent," the report explained. "They can quickly spread to the traditional banking system, amplifying shocks and complicating crisis management." With Reuters.