IMF warns markets too calm as Mideast conflict masks risks

• Muted market stress suggests investors have yet to price in worst-case scenarios, says report

Global financial markets entered 2026 with robust strength and optimism, but the system’s apparent resilience against the ongoing Middle East war may be masking some severe underlying vulnerabilities, the International Monetary Fund (IMF) warned in its latest report.

The IMF released its Global Financial Stability Report for April on Tuesday.

Since the start of the US-Israel war on Iran, global equity prices have fallen 8%, the report said.

The declining equity prices interrupted a rally previously boosted by strong corporate profits.

Global markets reacted swiftly to the conflict, but the resulting asset price decline has been absorbed in what IMF calls “broadly orderly” fashion.

“Nonetheless, this resilience should not be taken at face value,” it warned, saying that the current market environment continues to reflect temporary cycles of escalation and de-escalation.

Investors have yet to fully price in the threat of severely adverse scenarios the war could still potentially take, the report said.

Inflation expected to rise

The war’s primary influence on global markets has been through inflation, with average inflation expectations over the next two years rising by 0.3 to 0.8 percentage points, led by the surge in energy prices due to the effective closure of the Strait of Hormuz.

Central banks across the world are facing a dilemma, with near-term inflation risks on the rise. They are compelled to pursue monetary policy focusing on price stability, but the longer the war continues, the more damaging high rates would be on broader economic growth and labor markets.

Advanced economies are facing this crisis with elevated debt levels and limited fiscal space.

“In G4 economies, governments have reduced the weighted average maturities of debt issuances over the past three years by 0.1 to 2.6 years,” the report said.

Half of G4 sovereign debt is currently held by price-sensitive investors such as investment funds and households.

Due to this, advanced economies’ sovereign bond yields may respond more aggressively to sudden inflation shocks than before, while emerging markets remain vulnerable due to their debt reliance and carry-trade strategies, leaving them vulnerable to shifts in global risk sentiment.

“The key financial stability risks do not lie in the initial shock itself, but in amplification channels that could turn market volatility and sell-offs into more acute stress,” the report said.

“Elevated leverage in parts of the nonbank financial sector, increased concentration in equity markets, and historically tight credit spreads all raise the potential for abrupt forced-selling and sudden liquidity strains through margin and collateral calls.”

The IMF noted that governments are constrained by persistent deficits and lack the fiscal space to deploy the policy needed to bail out the system, which is complicating the crisis response.

Meanwhile, central banks have recently reduced balance sheets to free up capacity to launch emergency asset purchases if markets freeze.

“Targeted prudential measures, robust supervision, effective stress testing, and well-designed liquidity tools can also be deployed,” the IMF suggested.

The IMF added that financial resilience cannot be inferred from the current absence of obvious stress in markets, especially in an era of heightened geopolitical uncertainties, urging policymakers to “prepare, don’t predict.”