ESMA Report on Trends, Risks and Vulnerabilities

23/03/2021 | ESMA

Market monitoring

ESMA risk assessment

Risk summary

EU financial markets recovered from the significant COVID-19 related market stress in 2H20, in the light of notable public policy interventions, the announcement of new vaccines available in the short term and the reduction of Brexit-related uncertainty at the end of the reporting period in the EU. However, risks in markets under ESMA’s remit remained very high. The significant rebound of equity markets and the valuation of debt indices, which reached pre-crisis levels across all segments, contrast with the weak economic fundamentals. The main risk we see for EU financial markets is that this ongoing decoupling leads to a reversal in investor risk assessment and a sudden market correction in a context where investors remain sensitive to events, exposing lessliquid markets to disorderly sell-off episodes. Prices of non-regulated cryptoassets at all-time highs imply significant risks for investors. Credit risk is likely to increase further because of significant corporate and public debt overhang. The extent to which these risks will further materialise will critically depend on three drivers: the economic impact of the pandemic, market expectations of monetary and fiscal support measures, and any occurrence of additional external events in an already fragile global environment.

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