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IMF sees potential for further market turbulence as central banks hike rates

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International Monetary Fund warns of more turmoil ahead for financial markets as countries around the globe shift to recovery mode.

Tobias Adrian of the IMF was a financial advisor and director for monetary and capital market. He said that while policymakers promise a smooth transition and tightening monetary policy, central banks may push more risky stocks into the red as they try to curb inflation.

Adrian indicated that there could be more tightening of financial markets, which could lead to risk assets such as equities being sold off.

Adrian stated, calling for order and transparency, that market reactions will depend on the central banks’ communication of their intentions.

On Wednesday, the Federal Reserve signaledThe company could stop its asset purchase program and increase interest rates starting in March.

He stated, “This is going to hopefully not be disorderly. But it’s going will be an ordered adjustment in terms valuations.”

New York Stock Exchange, February 25, 2020.

Zhang Mocheng | Xinhua | Getty Images

He stated, “We estimate, for instance, that for an unexpected additional tightening 50 basis points you could witness a substantial further selloff in the equity market,” and noted that not all sectors will be affected equally.

Adrian suggested that this disruption could be reflected in crypto markets as well. Crypto markets also have an “increased correlation” to traditional financial markets. However, they have seen a large sell-off so far this year.

Adrian made these comments as IMF published on Thursday their Global Financial Stability Report. The comments come after the IMF’s World Economic Outlook was released earlier in this week. downgraded global growth to 4.4% in 2022.

The report from Thursday stated that, despite rising interest rates causing some downward pressure on corporate earnings, most sectoral earnings will surpass those of pre-pandemic years in 2022.

Meanwhile, bond spreads —a key metric for measuring the price of a group of bonds — remain below average 2019 levels.

Pressure on emerging markets

Report by the IMF highlighted “spillover” risks for emerging markets that result from policy normalization between advanced economies.

IMF warned previously that U.S. policies would be tightened. hamper the economic recovery in emerging Asia.

Adrian noted that there has been a noticeable slowdown in capital flows to many emerging markets over the past three-months. Adrian also indicated that they could be expecting a slowerdown moving forward.

A number of central banks raised their policy rates due to inflationary pressures in emerging market economies, placing a risk on the nascent recovery from economic recession.

According to the report, “A further tightening in domestic financial conditions during a high fiscal deficit and when there is a need for external financing could cause significant strains.”

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