The International Monetary Fund released the April 2026 Global Financial Stability Report, judging global financial stability risks to be elevated amid the ongoing war in the Middle East and warning that renewed inflationary pressures and a potential tightening in global financial conditions could interact with multiple amplification channels. The report sets out policy priorities aimed at strengthening resilience, including operational readiness of liquidity and funding facilities and stronger oversight of nonbank financial intermediaries. Market developments since late February include falling equity prices and rising bond yields, reflecting higher energy prices and upward revisions to inflation and policy rate expectations, with emerging market assets in commodity-importing and more vulnerable economies disproportionately affected. The report highlights vulnerabilities that could transmit market stress into instability, including rollover risks in core sovereign bond markets amid elevated public debt and greater reliance on short-term issuance, a potential revival of the sovereign–bank nexus, carry trade unwinds and capital outflows in emerging markets, and high leverage among nonbanks such as hedge funds and leveraged exchange-traded funds that could force deleveraging and strain liquidity. It also points to stretched equity valuations and concentration in artificial intelligence related firms, rising borrower stress and growing retail exposure in private credit despite limited liquidity mismatches, and a weakened equity–bond hedging relationship that increases the risk of simultaneous selloffs. A separate chapter finds that cross-border portfolio flows to emerging markets are increasingly intermediated by nonbank investors, making flows more sensitive to shifts in global risk sentiment, particularly for countries with high debt, low reserves, or weak institutional quality. Hedge funds and investment funds are identified as more risk-sensitive than other nonbanks, with passive mutual funds and exchange-traded funds the most sensitive within the investment fund sector. Recommended responses include strengthening macroeconomic fundamentals and institutional quality, building fiscal and external buffers, using proactive risk management consistent with the IMF’s Integrated Policy Framework, and deepening international cooperation to close regulatory and data gaps, alongside continued proportionate monitoring of the expansion of private credit markets and stablecoins in emerging markets.

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