The International Monetary Fund (IMF) released a report on Monday warning that global trade tensions could trigger drastic stock market corrections and even threaten financial stability. The report points out that since 2022, geopolitical risk indicators (including wars, trade conflicts, etc.) have surged significantly, and if the situation worsens, global stock markets may face systemic shocks.

Geopolitical storm hits, emerging markets bear the brunt

IMF research has found that major risk events such as wars and trade wars typically lead to an average monthly drop of 1% in global stock markets, with emerging markets experiencing a drop of up to 2.5%. During the Russia-Ukraine conflict in 2022, the monthly return of global stock markets plummeted by 5%, far exceeding the impact of other risk events. Nowadays, the risk of a trade war is accumulating, and Wall Street is experiencing severe volatility - the S&P 500 index has fallen more than 10% since the beginning of the year, gold prices have repeatedly hit historical highs, and market risk aversion has soared to extreme levels.

The Federal Reserve is trapped in a dilemma: cutting interest rates or fighting inflation?

Federal Reserve Governor Waller admitted that the Trump administration's tariff policy is "one of the biggest economic shocks in decades" and may force the Fed to cut interest rates when inflation is high to avoid an economic recession. If comprehensive tariffs are implemented, the US economy may experience a "sharp slowdown" and the unemployment rate may soar to 5%. But if tariffs are only maintained at around 10% and inflationary pressures are controllable, the Federal Reserve may still cut interest rates three times within the year as planned. Waller bluntly stated that the current policy-making is like "moving forward in the dark", and uncertainty has reached a historical high.

Market tail risks surge, putting pressure on the global financial system

The IMF emphasizes that trade wars not only increase the risk of stock market crashes, but may also impact the global financial system through channels such as sovereign debt defaults and capital outflows. The historical data of the US China tariff war shows that large-scale tariff measures have led to significant declines in the stock markets of both countries. Nowadays, US consumer inflation expectations have risen to their highest level since 1981, economic recession warnings are frequent, and market "tail risks" (extreme loss probabilities) are rapidly rising.

Summary: The global market is standing on the "cliff edge", is a storm approaching?

As the IMF spring meeting approaches, the risk of a trade war may become a focal point of discussion. If tensions escalate, global stock markets may face their most severe test since 2008. Although the Federal Reserve holds the tool of interest rate cuts, its policy space is extremely limited under the pressure of high inflation and recession risks. Will the financial storm triggered by the trade war become the 'last straw' that crushes the market? Investors need to fasten their seat belts to prepare for potential market shocks.