The risk of a market correction remains high, according to the latest readings from the European Securities and Markets Authority (ESMA).
“The market environment remains defined by very high uncertainty, continued elevated asset valuations with risk of price corrections and abrupt shifts in risk premia,” the ESMA said in a new report, which also noted important risk drivers such as the economic recovery, inflation, high debt levels, and political and event risks.
Additionally, market reactions to issues such as the threat of defaults in the Chinese real estate market “have shown the continued importance of event risks,” the report noted, as these kinds of issues can impact investors and financial stability.
On the economic front, the macro outlook has brightened in recent months, the ESMA said, “and there is realistic scope for a reduction in risk levels if improvements in financial markets prove resilient in the medium-term.”
However, the report cautioned that the easing of risks depends on “the ability of markets to withstand the potential future phasing out of the pandemic-linked public and monetary support without material disruptions.”
Looking ahead, the ESMA said that the lasting scars of the pandemic and the prospect of its resurgence in the fourth quarter are something to watch.
So, too, is uncertainty around inflation and the availability of fiscal and monetary policy supports, a factor that “may exacerbate long-term vulnerabilities both for the financial and non-financial sectors.”