Global Financial Markets Show Early Signs of Stress

Liquidity Conditions Tighten Amid Geopolitical Conflict

A new report by Elara Capital highlights early signs of stress in global financial markets due to tightening liquidity conditions amidst a prolonged geopolitical conflict. Global equity flows have turned negative for the first time since January 2026, signaling a shift in investor sentiment as uncertainty deepens.

Investor Sentiment Shifts

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Data shows that US equity funds witnessed significant outflows of $27 billion over the past week, reversing the $50 billion inflow recorded earlier on hopes of de-escalation. Analysts attribute the reversal to weakening technical indicators, with major indices slipping below key support levels. Domestic investors accounted for the bulk of the selling, pulling out approximately $24 billion, while foreign investors continued their withdrawal streak for a third consecutive week.

Sectors Affected

Small- and mid-cap stocks bore the brunt of the sell-off, with $12 billion and $9 billion in outflows respectively, while large-cap stocks remained relatively stable. Emerging markets (EMs) also experienced sustained pressure, though at a moderating pace. Total outflows from global emerging market (GEM) funds stood at $730 million this week, down from $2.7 billion the previous week.

India Focused Funds

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India stood out as the most affected market, with foreign investors pulling out nearly $970 million from Indian equities in the latest week alone, bringing total outflows over the past three weeks to $3.7 billion. India-focused funds have faced persistent selling pressure, particularly through exchange-traded funds (ETFs), largely driven by US-based investors.

Safe Haven Assets

Traditional safe-haven assets are also seeing outflows. Gold funds recorded a sharp $7 billion withdrawal—the largest since October 2025—suggesting forced liquidation rather than defensive repositioning. Commodity equity funds also experienced record outflows of $4.7 billion. Analysts say this pattern mirrors mid-2021 trends, where an initial correction in flows was followed by stabilization before a later peak. Silver funds, however, saw modest inflows of $480 million, indicating early signs of selective investor interest within the commodity space.

Geopolitical Tensions

The report notes that while the magnitude of outflows remains moderate for now, continued geopolitical tensions could further strain global liquidity conditions.