The International Monetary Fund (IMF) has warned that escalating geopolitical risk events, including trade tensions, pose a serious threat to global financial stability, potentially triggering sharp corrections in asset prices and elevating systemic market volatility.
In a report released Monday from its forthcoming Global Financial Stability Report, the IMF emphasised that geopolitical shocks such as wars, trade restrictions, and diplomatic conflicts can have significant spillover effects across global markets.
While the report refrained from citing specific incidents, the warning follows a surge in trade frictions, including recent tariff measures announced by U.S. President Donald Trump.
The IMF said its research shows that major geopolitical events, particularly international military conflicts, result in notable declines in stock market performance.
On average, such risk events have led to a one per cent monthly drop in global stock prices, while emerging markets have suffered steeper losses of around 2.5 per cent.
Conflicts such as Russia’s invasion of Ukraine in 2022 have had even more dramatic effects, depressing equity returns by an average of 5 per cent monthly.
“These risk events contribute to heightened financial market volatility and can weaken investor confidence, posing direct threats to economic stability,” the IMF said.
According to the Fund, the frequency and severity of geopolitical risks have increased markedly since 2022, as reflected in news-based indicators tracking conflict, terrorism, military expenditure, and trade-related developments.
The volatility is not limited to equities—geopolitical tensions also elevate sovereign risk premiums and increase the cost of insuring against government defaults, particularly in vulnerable economies.
IMF officials urged financial institutions to strengthen their defences by maintaining adequate capital and liquidity buffers. Institutions were also encouraged to adopt robust risk assessment frameworks, including stress testing and scenario analyses, to evaluate and manage potential exposure to geopolitical shocks.
“The financial sector must be prepared to absorb the impact of sudden market dislocations stemming from rising uncertainty,” it noted.
The IMF also warned that such shocks exacerbate so-called “tail risks”—the probability of extreme losses in financial portfolios, which can precipitate wider stock market crashes and deepen economic downturns.
According to the IMF, the full Global Financial Stability Report will be released during the IMF and World Bank Spring Meetings, scheduled to begin the week of April 21. Trade tensions and global financial risks are expected to be central themes during the discussions.
