Heightened geopolitical and policy uncertainty represent some of the biggest risks to the market in the year ahead, the European Securities and Markets Authority (ESMA) warns in a new report.
Specifically, the risks in the markets that ESMA oversees remain at high levels, "reflecting very high risk in securities markets, and elevated risk for investors, infrastructures and services," the report says. Overall, market and credit risks remain very high, as are liquidity and contagion risks.
However, political and policy uncertainty from events such as upcoming elections in Europe is the main risk driver for 2017, the ESMA report also indicates.
"Uncertainty about political developments in Europe could trigger abrupt swings in financial asset prices in the coming months," the report notes, adding that "broader geopolitical risks" could also create additional market uncertainty.
Political and policy uncertainty was strong in the second half of 2016, following the U.K.'s Brexit referendum and the U.S. elections, the report states. However, equities market volatility decreased as concerns about the health of banks eased and investment fund returns rebounded.
Still, investment fund liquidity "remained a concern, with bond funds facing outflows after the U.S. elections," it says.