EU financial markets have have started 2026 facing heightened risks, even though they were resilient in the second half of last year, according to the European Securities and Markets Authority (Esma).
The regulator said markets remain vulnerable to sudden price swings, driven by geopolitical tensions, stretched equity valuations and an uncertain economic outlook across the EU.
The report was finalised before the latest global shocks linked to the Middle East tensions that emerged earlier this year. Even so, the initial reactions in EU markets reflected many of the transmission channels and vulnerabilities already highlighted in Esma’s analysis.
According to the regulator, the risk of abrupt market corrections remains significant as price movements across asset classes become more correlated, increasing the potential for “contagion during periods of stress”. At the same time, cyber and hybrid threats targeting financial firms and market infrastructure are raising the risk of operational disruptions.
Equity markets’ global valuations reached record highs in the second half of 2025 and early 2026. Esma said elevated valuations could make markets more vulnerable to disorderly corrections if sentiment shifts.
Sovereign bond spreads across Europe, relative to Germany, tightened, although market liquidity eased slightly as broader macroeconomic uncertainty persisted. Credit conditions across the EU remained uneven, with increasing concern about developments in the US private credit market.
Central securities depositories recorded a surge in settlement fails for ETFs earlier in the year, followed by increased settlement fails for Ucits and equities later in the summer months, highlighted Esma.
In the asset management sector, equity funds recorded strong returns, driven by rising valuations and greater exposure to US markets. Meanwhile, the ongoing expansion of private finance funds continues to support financing for the real economy. However, Esma shared that this segment needs monitoring due to concerns over limited transparency and increasing interconnectedness within financial markets.
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Retail investment behaviour is changing, with investors increasingly moving away from active strategies toward passive ones, contributing to strong inflows into ETFs. Esma also warned that the influence of social media on younger investors could encourage speculative bubbles, while leveraged products such as turbos frequently lead to losses.
Equity issuance remained weak, as IPO activity continued to decline and secondary offerings provided only limited support. Although there is no clear evidence of increasing delistings across Europe, the report highlighted a persistent fall in new listings.
Global climate policy sentiment weakened during the period, putting pressure on ESG investing. At the same time, rising awareness of physical climate risks pushed catastrophe bond issuance to record levels in 2025, with EU funds increasingly providing exposure to this market.
Tokenisation is still at an early stage but is gradually gaining traction, particularly through tokenised money market funds. Interest in the potential role of quantum computing in financial markets is also increasing, although the technology remains experimental and far from commercial deployment.
Verena Ross, Esma’s chair, said: “The recent escalation of conflict in the Middle East continues to significantly affect markets, leading to sharp increases in energy and commodity prices, as well as elevated volatility.
Esma’s latest risk monitoring analysis highlights the potential for disorderly corrections that could spill over across markets. In this context, disciplined risk monitoring and risk management remain essential to ensure orderly markets, a core objective for Esma.”
