The European Securities and Markets Authority (Esma), the EU’s financial markets regulator and supervisor, has said markets remain “very sensitive”, despite lower volatility earlier this year, setting out the key risk drivers currently facing EU financial markets.
External events continue to strongly impact the evolution of financial markets, and Esma stated that it envisages high or very high overall risks in the markets within its remit.
Earlier in 2024, less volatile markets and a renewed “search-for-yield” behaviour in riskier segments indicated general market anticipation of a “soft landing.” However, Esma cautioned that recent events demonstrate how markets remain “very sensitive, especially to interest rate developments, deteriorating credit risk, and political and electoral news.” It warned that there remains a high risk of corrections in the context of fragile market liquidity, affecting both equity and other markets.
Verena Ross, Esma’s Chair, said: “Markets are getting more nervous about the economic outlook and political events, as the dip in equity valuations in early August and market volatility around recent European and French elections shows. Close monitoring of the financial markets in our remit and strong coordination of supervisory efforts with national authorities remains our priority.
We continue to see risks in the fund area linked to liquidity mismatches, particularly in the real estate sector, and deteriorating quality of assets linked to interest rate, credit risk and valuation issues.”
Highlighting structural developments, Esma highlighted that in 2024, European corporate access to capital through markets has remained stable, with a strong start in corporate bond issuance that later declined. A significant maturity wall looms from 2024 to 2028, raising concerns about corporate debt sustainability, especially in lower-quality sectors.
Interest in sustainable investments has been high, but recent slowdowns in green bond issuance and outflows from sustainable funds in late 2023 have raised concerns. Companies with credible transition plans may attract more investment through transition finance instruments.
“Illiquid premiums don’t come easy”
The crypto market surged in early 2024, driven by US approvals of Bitcoin and Ether ETPs, but experienced volatility in August, highlighting concentration risks.
Securities markets saw asset prices rise with low volatility, though some disruptions occurred around EU elections and weak US economic data. While fixed income markets showed narrowing spreads, declining credit quality and liquidity risks, particularly in real estate funds, remain key concerns.
EU funds performed well across categories, with bond funds and money market funds seeing inflows. Despite rising interest rates, a perceived decline in credit risk kept credit spreads low. However, bond fund credit quality has deteriorated, increasing the risk of a disorderly repricing of risky assets. Liquidity and valuation risks persist, particularly in open-ended real estate funds, which are vulnerable due to liquidity mismatches and falling housing market valuations.
