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Talking Points:

  • The IMF also released their World Economic Outlook report, with signs that growth is slowing
  • Trade tensions, pressures in emerging markets, and rising interest rates were some of the highlighted risks to global stability
  • The report comes amid plummeting US equities and a risk-off attitude in markets

The International Monetary Fund and the World Trade Organization met in Bali, Indonesia this week to discuss the global economy. At the event, the IMF released their World Economic Stability report and the Global Financial Stability Report. In the biennial GFSR, IMF officials highlighted areas of increased risk in the global economy. Highlighted areas include trade wars, emerging market pressure, rising interest rates, and contagion.

Read about the ongoing economic conflicts with A Brief History of Trade Wars.

Trade wars were the most notable risk added to the report, due to their relatively recent developments. IMF officials expressed concern for headwinds to growth and stability because of the impacts on trade from tariffs. The headwinds include increased cost and rising geopolitical tensions. While geopolitical tensions are certainly high amongst the world’s largest economies, rising costs are proving more inhibitive to emerging markets.

MSCI EEM Emerging Markets Price Chart Daily, Year-to-Date

IMF Warns of Rising Instability in the Global Financial System

Thus, emerging market weakness was another major area of concern in the report. Officials asserted emerging markets were disproportionately vulnerable to trade wars and other factors highlighted in the report. Coupled with rising interest rates and a strong US Dollar, emerging markets are indeed in troubled waters. Many indebted emerging markets possess large portions of that debt in foreign denominations, particularly US Dollars. These balances will be arduous to pay off as borrowing becomes more expensive and their respective currencies face a strong USD.

Witnessed briefly in August when the Turkish Lira dropped in value, the IMF found contagion is also a potential flashpoint for global instability. Although many developed economies maintain moderate growth, their outstanding loans to emerging markets make them more vulnerable if emerging markets as a whole should falter.

See how our clients are positioned on different assets and currency pairs with IG Client Sentiment.

S&P 500 Price Chart Hourly, October

IMF Warns of Rising Instability in the Global Financial System

Coincidentally, the stability report was released as US equities face steep declines. As the recent leader in global returns, the S&P 500 has finally come under pressure as rising interest rates spook investors. With the volatility index at 6-month highs, blue-chip and growth stocks alike are falling precipitously. With that in mind, such an ominous report from the IMF is unlikely to spur a risk-on attitude.

Despite a tumultuous climate in the markets today and on the horizon, the IMF also outlined some positives enjoyed by the global economies. Following the 10-year anniversary of the collapse of Lehman Brothers, IMF officials cited more resilient, liquid, and more intensively supervised markets as areas for optimism. Especially in the financial intermediary industry, many past risks have been curtailed found the inter-governmental body. Still, some areas need to be closely reviewed the body warned.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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