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IMF sees potential for further market turmoil as central banks raise rates

The International Monetary Fund has warned of further turmoil ahead for financial markets, particularly as governments around the world shift into high gear in recovery mode.

Central bank moves to tighten monetary policy and rein in rising inflation could push riskier stocks deeper into the red even as policymakers commit to a smooth transition, financial adviser Tobias Adrian said. and director of monetary and capital markets at the IMF, to CNBC’s Geoff Cutmore.

“We could certainly see a further tightening of financial conditions, which means that risky assets such as equities could still sell off,” Adrian said.

The market’s reaction will largely depend on central banks’ ability to communicate their intentions, Adrian said, calling for order and transparency.

On Wednesday, the Federal Reserve signaled that it could end its asset purchase program and start raising interest rates as early as March.

“Hopefully it won’t be messy, but it will be an orderly adjustment in terms of valuations,” he said.

Traders work at the New York Stock Exchange on February 25, 2020.

Zhang Mocheng | Xinhua | Getty Images

“We estimate, for example, that for another unexpected tightening of 50 basis points, you could see substantial further selling in equity markets,” he added, noting that some sectors would be more affected than others. .

Such disruption could also translate to crypto markets, Adrian said, which have shown “increasing correlations” with traditional financial markets and have seen a sell-off this year.

Adrian’s comments come as the IMF released its Global Financial Stability Report on Thursday. This follows the release of its World Economic Outlook earlier this week, which brought global growth down to 4.4% in 2022.

Despite the downward pressure from higher interest rates, Thursday’s report notes that corporate profits are expected to exceed pre-pandemic levels in 2022 in most sectors.

Meanwhile, bond spreads – a key metric for pricing a group of bonds – remain below average levels in 2019.

Emerging markets under pressure

The IMF report also highlighted the risks of “spillovers” to emerging markets from the normalization of policies in advanced economies.

The IMF had previously warned that US policy tightening slow down the economic recovery in emerging Asia.

“We have certainly seen capital flows through many emerging markets slow down already over the past three months, and we could see a further slowdown in the future,” Adrian said.

Inflationary pressures in emerging markets have also led many central banks to raise their policy rates, jeopardizing the nascent recovery in growth.

“Such further tightening of domestic financial conditions at a time when fiscal deficits and external financing needs are high could generate significant stress,” the report said.