The European Securities and Markets Authority (ESMA) has issued its second risk monitoring report for 2024, highlighting the growing sensitivity of EU financial markets following strong early-year performance.
ESMA, the EU’s financial markets regulator and supervisor, identifies significant risks across its remit, driven by external events that continue to impact market evolution.
In early 2024, less volatile markets and a resurgence of risk-taking in higher-yield segments suggested expectations of a ‘soft landing.’ However, recent developments underscore the market’s heightened sensitivity, particularly to interest rate changes, deteriorating credit risk, and political news. ESMA warns of a high risk of market corrections, exacerbated by fragile liquidity conditions in equity and other markets.
“Markets are increasingly nervous about the economic outlook and political events, as evidenced by the dip in equity valuations in early August and volatility around recent European and French elections,” said Verena Ross, ESMA’s Chair. She emphasized the need for continued close monitoring of financial markets and strong coordination with national authorities.
Key Structural Developments in H1 2024
– Market-Based Finance: Capital availability for European corporates has remained stable, though the environment remains challenging for equity issuance. IPO activity showed signs of recovery, while corporate bond issuance, strong in Q1 2024, declined in the second quarter. The outlook for corporate bonds reveals a significant maturity wall from 2024 to 2028, raising concerns about corporate debt sustainability, especially in lower-quality segments.
– Sustainable Finance: Interest in sustainable investments has been strong in recent years, signaling investor support for the green transition. However, recent ESG-related market trends have raised concerns about the ability to mobilize private capital, with a slowdown in green bond issuance and outflows from sustainable funds in the latter half of 2023. The success of transition finance instruments may depend on firms’ ability to present credible transition plans.
– Financial Innovation: Crypto-assets surged in the first half of 2024, driven by the approval of spot Bitcoin and Ether exchange-traded products (ETPs) in the US, pushing global market valuation to EUR 2.2 trillion by June, a 40% increase from end-2023. Liquidity levels returned to pre-FTX collapse levels, but volatility in early August led to significant declines in crypto valuations. High concentration in both crypto-assets and exchanges remains a concern.
Ongoing Market Monitoring
– Securities Markets: Asset prices saw upward trends with minimal volatility in early 2024, amid expectations of future rate cuts. Market volatility spiked during the EU elections in June and July, and a brief dip in global equity valuations in early August was linked to weaker-than-expected U.S. economic data. Corporate bond spreads, particularly for high-yield corporates, continued to fall despite declining credit quality, particularly in the real estate sector, potentially indicating a misjudgment of risks.
– Asset Management: EU funds performed positively across categories, with inflows into fixed-income funds, including bond funds and money market funds (MMFs). Despite rising interest rates, a broad perception of declining credit risk has kept credit spreads low. However, the declining credit quality of bond fund portfolios raises concerns about the potential for disorderly repricing of risky assets. Liquidity risks and potential losses related to interest rate, credit risk, and valuation issues remain, with open-ended real estate funds particularly vulnerable due to structural liquidity mismatches and downward pressure on housing market valuations.
ESMA continues to prioritize market monitoring and coordination with national authorities to mitigate these risks.
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