Written by Andrea Shalal
WASHINGTON (Reuters) – The International Monetary Fund reported on Monday that major geopolitical risk scenarios, like trade disputes, can lead to significant declines in stock prices.
This situation can cause market fluctuations that may jeopardize financial stability, according to a section from the anticipated Global Financial Stability Report.
The IMF refrained from citing specific incidents, such as the sweeping tariffs recently announced by U.S. President Donald Trump. However, it did observe that risk indicators based on news—such as conflicts, wars, terrorist actions, military expenditure, and trade barriers—had markedly increased since 2022.
In a related blog post, the IMF called on financial institutions to maintain sufficient capital and liquidity to manage potential losses arising from geopolitical risks, recommending the implementation of stress tests and other methods to identify and mitigate such threats.
The report indicated that research conducted by the IMF revealed that significant risk events, including wars, diplomatic conflicts, or terrorism, generally led to an average decline of 1 percentage point in stock prices monthly across all nations, with emerging markets experiencing an average drop of 2.5 percentage points.
International military conflicts, like Russia’s invasion of Ukraine in 2022, constituted the most critical risk factors, causing stock returns to decrease by an average of 5 percentage points monthly—double the decline associated with other geopolitical risks.
The IMF is set to publish the complete report during its spring meetings with the World Bank in the week of April 21, where Trump’s tariff announcements are expected to be a focal point.
Last week, Wall Street experienced its most erratic trading since the COVID pandemic began in 2020. The benchmark Standard & Poor’s 500 index has fallen more than 10% since Trump assumed office on January 20, while gold prices have reached record highs.
A recent U.S. consumer survey indicated that concerns about inflation have surged to their highest levels since 1981, while financial institutions have issued warnings about the increasing likelihood of a recession.
The IMF also noted that economic uncertainty elevates what are termed market tail risks—the potential for extreme, unforeseen losses within an investment portfolio—which, in turn, raises the risk of stock market crashes.
Moreover, heightened geopolitical concerns tend to increase sovereign risk premiums—that is, the costs associated with credit derivatives that offer protection against default—which may impact other economies through trade and financial connections.
In the accompanying blog, the IMF examined the effects of U.S.-China tariff actions from 2018 to 2024, highlighting that certain larger announcements had led to declines in share prices in both nations.
