The European Securities and Markets Authority (ESMA) recently published its first risk monitoring report of 2024. Despite stating that markets in its remit have remained “remarkably resilient” in the second half of 2023, the authority expects markets to “remain very sensitive”. A high risk of corrections continues in “a context of fragile market liquidity in equity, bond, and crypto markets”.
The report listed higher-for-longer interest rates and geopolitical issues as key risk drivers. Downturn in the real estate market due to recent interest rate developments “is feeding into financial markets and investors through lower equity and debt pricing of real estate firms, rating downgrades, and declining real-estate fund valuations and liquidity risks”. In addition, greenwashing risks “undermining the credibility of green finance”, while the rise of social media has increased the spread of false or misleading investing information.
In addition to risk drivers, ESMA’s report also covered structural developments and the status of key sectors of the financial markets. For the latter, in the securities markets, ”equity valuations were moderately up in the second half of 2023, driven by an end-of-year rally linked to expectations of interest rate decreases in 2024. Volatility remained contained, while bid-ask spreads were relatively elevated, highlighting market nervousness. Fixed-income markets were lower overall towards the end of 2023, with marked declines in yields for sovereign and corporate bonds in December. The credit quality of high-yield non-financials continued to decline, particularly associated with real estate, with default rates trending upwards”.