After a strong start, markets have proven increasingly edgy this year. And risks continue to lurk, says the European Securities and Markets Authority (ESMA).
In its latest review of the risk landscape, European regulators said overall risk remains “high” or “very high” within the region’s markets.
While markets generally expected a soft landing coming into the year, “more recent events show how markets remain very sensitive, especially to interest rate developments, deteriorating credit risk and to political and electoral news,” ESMA said.
The report warned the risk of a market correction is still high, given the fragile liquidity conditions in financial markets.
“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,” said Verena Ross, chair of ESMA, in a release.
“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.”
With many corporate bonds set to mature over the next several years, “corporate debt sustainability remains a considerable risk, especially in lower quality segments,” ESMA said.
Further, the credit quality of bond funds’ portfolios “has continued to deteriorate, raising the risk of a disorderly repricing of risky assets.”
In the fund sector overall, the regulators remain concerned about liquidity too.
“Open-ended real estate funds remain particularly vulnerable given their structural liquidity mismatch and downward pressure on valuations in housing markets,” ESMA said.