Financial market risks are high and rising: ESMA

Amid an array of elevated risks, investors should brace for further market turmoil, the European Securities and Markets Authority (ESMA) is warning.

In its latest report on market risks and vulnerabilities, the region’s securities regulator said overall market risks remain at the highest level, with the fallout from Russia’s invasion of Ukraine compounding the effects on an economy and financial markets grappling with already-high inflation.

“Risks remain very high in securities markets and for asset management,” it said, adding that contagion and operational risks are also “very high,” along with liquidity and market risks. Further, credit risk is high and “expected to rise.”

“Looking ahead, the confluence of risk sources continues to provide a highly fragile market environment, and investors should be prepared for further market corrections,” ESMA said in its report.

The elevated risk environment comes on the heels of a first half that already experienced heightened volatility and weakness in both traditional financial markets and crypto markets.

“The current high inflation environment is having impacts across the financial markets,” said Verena Ross, chair of ESMA, in a release. “Consumers are faced with fast-rising cost of living and negative real returns on many of their investments. Consumers also need to watch out as they might be targeted by aggressive marketing promoting high-risk products that may not be suitable for them.”

“The Russian invasion of Ukraine continues to significantly affect commodity markets, leading to rapid price increases and elevated volatility,” she said. “These present liquidity risks for exposed counterparties and show the continued importance of close monitoring to ensure orderly markets.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.