Market risks remain very high, amid ongoing global trade turmoil and growing hype in the crypto sector, warns the European Securities and Markets Authority (ESMA).
In its latest risk monitoring report, ESMA said that investors should be alert to the threat of sharp market corrections and the liquidity strains that could accompany an abrupt downturn.
“Geopolitical events continue to have a strong impact on the evolution of financial markets,” it said — noting that escalating trade conflict have driven increased uncertainty and market volatility.
Additionally, risks in crypto-asset markets have also ramped up, ESMA said, as “exuberance has been fuelled by political developments in the U.S. and the emergence of new, high-risk business models.”
In particular, “there are growing concerns that potential conflicts of interest may add to existing issues related to governance, credibility and money laundering” in the crypto sector, it noted.
In the asset management sector, investment funds have generally proven resilient in the face of elevated volatility, ESMA said — but, leverage and liquidity risks persist, it noted.
Asset managers are also increasingly betting on the artificial intelligence theme with the launch of new AI-focused investment funds, it said. Alongside the investment risk, the development of AI also poses an array of regulatory risks, the report noted.
It also said that corporate debt levels remain a “concern,” noting that bond spreads have widened recently, particularly in the high yield sector.
“We have recently seen strong volatility in most global markets, including for equities, bonds and crypto-assets. Whilst the situation has stabilized since March/April, global uncertainties remain. Any unexpected geopolitical developments could risk driving sudden market corrections,” said Verena Ross, ESMA’s chair, in a release accompanying the report.
“Furthermore, the persistent growth and sophistication of cyber and hybrid threats amid heightened geopolitical tensions is amplifying the risks of operational disruptions to financial markets,” she added. “In this environment retail investors are at risk of making poor trading decisions due to information overload or misinformation, a phenomenon particularly pronounced with social media and potential gamification of trading.”