Investor fears of a major asset price correction were stoked Friday by President Donald Trump’s renewed threats to raise tariffs on China, triggering a sell-off in U.S. stocks and a plunge in bitcoin, the world’s largest cryptocurrency.
However, despite the intermittent fluctuations, markets have remained generally resilient since April, when Trump unleashed his trade war, supported by expectations of monetary easing in most major advanced economies.
This dynamism contradicts the possible economic effects of tariffs and sovereign debt, risks that could be amplified by the interconnection of banks with poorly regulated non-bank entities, the IMF warned.
“Beneath the calm surface, the terrain is shifting in various parts of the financial system, creating vulnerabilities,” the IMF said in its semi-annual Global Financial Stability report.
“Valuation models indicate that risk asset prices are well above fundamentals, increasing the likelihood of disorderly corrections when adverse shocks occur,” he added.
Despite some negative economic data, equity and corporate credit valuations are “fairly elevated” due to enthusiasm for large-cap AI stocks, which are driving historic stock market concentration.
