(Bloomberg) -- The International Monetary Fund said the US election is creating “high uncertainty” for markets and policymakers, given the sharply divergent trade priorities of the candidates.
The knife-edge contest between Vice President Kamala Harris and former President Donald Trump comes against an already fraught geopolitical background, generating deep uncertainties that haven’t so far been reflected in financial markets, the IMF said in its Global Financial Stability Report published Tuesday.
That gap creates the risk of another potential round of volatility on global markets similar to the rattling August selloff.
“We worry there is a tension between the kind of optimism in markets and the level of valuations in markets” and “the geopolitical backdrop” within and across countries “that could give rise to further shocks,” Tobias Adrian, director of the fund’s monetary and capital markets department, said in an interview.
The Nov. 5 vote in the US represents a wildcard for markets and for economic watchdogs like the IMF, given the size of the economy and the direct impact US policies could have on global finance and trade.
Adrian pointed to tariff and industrial policies, as well as potential retaliation, as among the risks. Trump has threatened sweeping new tariffs on imports from China, and across-the-board charges on other trade partners too.
The IMF warnings over market risk from geopolitical shocks are a contrast with its view of the broader economic picture, which looks more sanguine. The fund slightly lowered its global growth forecast for next year in a separate report Tuesday and warned that downside risks are building, but it still sees the world economy on track for a so-called soft landing.
The financial stability report flagged risks including rising debt levels, as well as world politics.
“Accommodative financial conditions that keep near-term risks at bay also facilitate the buildup of vulnerabilities — such as lofty asset valuations, the global rise in private and government debt, and increased use of leverage by non-bank financial institutions — which raises risks to financial stability in the future,” the IMF study said.
It pointed to the August episode, when expected divergence between US and Japanese monetary policy triggered an unwinding of the yen carry trade, which sent Japanese stocks tumbling and reverberated through global markets.
“The market turmoil in early August 2024 — when stock market volatility spiked in both Japan and United States and global asset prices declined significantly — provided a glimpse of the violent reactions that can ensue when spikes in volatility interact with the use of leverage by financial institutions to create nonlinear market reactions and hasten selloffs,” the IMF said in the report.
The IMF research uses a measure of geopolitical uncertainty constructed by academics and based on text-mining news sources, along with standard indicators of financial-market volatility.
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