The risk of a sudden, severe correction remains: ESMA

The current high risk of a market correction won’t be easing anytime soon, warns the European Securities and Markets Authority (ESMA).

In a new report, ESMA said it currently sees an array of high risks to financial markets.

The primary threat remains a sudden revaluation of risk “amid the general decoupling of securities prices from economic fundamentals,” said the regulator.

Indeed, the report noted that valuations in most market segments are now at, or above, their pre-pandemic levels.

“[Valuations] remain highly sensitive to events and volatility, as shown by the market movements related to Gamestop and the impact that a potentially slow roll-out of vaccines had on equity prices,” ESMA said.

At the same time, ongoing monetary policy support has pushed fixed income valuations “far above” their pre-Covid-19 levels, ESMA said, reiterating that a sudden risk reassessment remains the primary threat to these markets too.

“Looking ahead, ESMA anticipates a prolonged period of risk to institutional and retail investors of further – possibly significant – market corrections and sees very high risks across its whole remit,” the agency noted.

Alongside the elevated market risks, ESMA said credit risk is also likely to increase due to rising corporate and public debt levels.

“The extent to which these risks will further materialize will critically depend on market expectations on monetary and fiscal policy support as well as on the pace of the economic recovery,” said the regulator.

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.