IMF Predicts Adjustments in Financial Markets in 2022

The IMF announced increased risks for the stock market and the corporate bond market in 2022. Earlier this week, the World Bank lowered its forecast for global economic growth from 4.1% to 3.2% due to the war in Ukraine.

Data is starting to come in this week from the International Monetary Fund (IMF) on how much the two-month war in Ukraine has hit the global economy. 

The key signals for investors is that global market experts and economists see growing risks for global GDP growth and the risks of a further fall in financial markets.

The main arguments are: high inflation, which may last longer than previously thought, and tightening of monetary policy and raising rates.

Following Russia's invasion of Ukraine on Feb. 24, the prospects for a recovery in the stock market and economy from the COVID pandemic have worsened, IMF experts say, pointing to supply chain shocks and rising energy prices.

On Tuesday, the IMF said in its World Economic Outlook report: "There is a growing risk that inflation expectations will deviate from central banks' inflation targets, prompting a more aggressive tightening response from policymakers."

The US Federal Reserve (Fed) expects to raise interest rates six more times in 2022, and the European Central Bank confirmed last week that it is ending its asset purchase program in the third quarter. 

However, this tightening of monetary policy could be accelerated if inflation remains high, which could affect market movement. For example, in the eurozone last month another record inflation rate was registered - 7.5% on an annualized basis; and the US reported its highest consumer price performance since 1981, with US annual inflation accelerating to 8.5% in March 2022.

The IMF expects inflation this year to reach 7.7% in the US and 5.3% in the euro area.

“Undoubtedly, there is a risk of further sell-off [in financial markets],” Tobias Adrian, director of monetary and capital markets at the IMF, told CNBC. “The intended consequences of monetary tightening is to tighten financial conditions to slow down economic activity and I would not be surprised if we were to see a certain amount of readjustment of asset valuations going forward and that could be in equity markets as well as in corporate bond markets and sovereign markets," he added.

The World Bank cut its full-year global growth forecast for 2022 by almost a full percentage point, from 4.1% to 3.2%, citing the impact Russia's invasion of Ukraine is having on the global economy.

World Bank President David Malpass said the biggest downside to the growth forecast is a projected 4.1% economic contraction in Europe and Central Asia, Reuters reported.

Other factors behind slower growth compared to January's forecast are higher food and fuel spending by consumers in developed countries around the world, Malpass said. 

This is partly the result of Western sanctions on Russian energy, which have driven up oil and gas prices around the world. Disruptions in the supply of Ukraine's agricultural exports are also cited as factors driving prices up.

Russia has blocked the main ports of Ukraine on the Black Sea, which has made it extremely dangerous for ships carrying grain and other products along a key sea route connecting Ukraine with the rest of the world. 

The World Bank is “preparing to further respond to the crisis given multiple crises,” Malpass said. “Over the next few weeks, I look forward to discussing with our board of directors a new 15-month anti-crisis package of about $170 billion for the period from April 2022 to June 2023.” 

This crisis financing package for Ukraine is even larger than the package organized by the World Bank for Covid-19 relief, which exceeded $160 billion.

On Wednesday, the Fed releases its Beige Book of economic conditions from late February to early April. 

"We expect the pace of economic activity to slow down a bit," UniCredit analysts say.

You should see much higher real bond yields before equity markets become less attractive,” said Michael Hewson, chief market analyst at CMC Markets. “The bigger question that the markets are grappling with right now is, has inflation peaked? If inflation has peaked, then it may be time to buy bonds again, which is why we see so much uncertainty about the future direction of stock markets.”

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