Brussels (The Brussels Morning Newspaper) – The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, issues its second risk monitoring report of 2024, outlining the fundamental risk drivers currently encountering EU financial markets.
What Key Risks Does ESMA’s 2024 Report Identify in EU Financial Markets?
Verena Ross, ESMA’s Chair, stated: “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.”.
How Are Market Volatility and Economic Uncertainty Impacting EU Financial Stability?
Capital availability for European corporates via capital markets has been broadly steady in 2024 so far. Although the market environment remains very difficult for equity issuance, there were indications of improvement in IPO activity. Corporate bond allocation was high in 1Q24 but fell in the second quarter of the year. The corporate bond perspective continues to offer a significant upcoming maturity wall from 2024 until 2028. In this context, corporate debt sustainability remains a considerable threat, especially in lower-quality segments.
How Is ESMA Responding to Rising Risks in the Real Estate and Fund Sectors?
In the last few years, a substantial interest in and uptake of sustainable investments has been sending optimistic signals about investors’ willingness to fund the green transition.
Financial innovation: Crypto-assets markets persisted to surge in the first half of 2024, fuelled by the support of spot Bitcoin and Ether ETPs in the US, to get a total global market valuation of EUR 2.2tn by end-June (+40% since end-2023).
Asset costs in early 2024 trended upwards with short volatility suggesting future rate cuts were being expected. Episodes of market volatility took place related to elections in the EU in June and July, and a short-lived dip in international equity valuations in early August was associated with weaker-than-expected US macroeconomic hands.
EU fund performance was favourable across categories and funds exposed to fixed-income tools (bond funds and MMFs) recorded inflows. The growth in interest rates has been offset by a broad-based market perception of declining credit risk, recalled in low credit spreads. However, bond fund portfolio credit quality, as calculated by credit rating, has continued to decline, raising the risk of a disorderly repricing of risky assets.
