ESMA Maintains Its Risk Assessment at a ‘Very High Level’

The market regulator believes credit risk will likely increase further.

The European Securities and Markets Authority (ESMA) issued its first Risk Dashboard (RD) for 2021 on Thursday, covering the first quarter of the year. According to the paper, the EU’s securities market regulator foresees an extended period of risk due to the market corrections fueled by economic fundamentals.

Fixed income valuations are now far above their pre-coronavirus levels, said ESMA, which can be attributed partly to the continued monetary policy support by the European Central Bank (ECB). Overall, valuations in the European Union financial markets for most segments are now above pre-COVID-19 levels.

“They 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,” the regulator noted.

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Regarding credit, ESMA believes the risk is likely to witness an increase due to the growing corporate and public debt levels seen across the bloc. Still, the regulator sees a ‘possibly significant’ prolonged risk to institutional and retail investors amid market corrections. “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,” the document adds.

GameStop and the ESMA

The mention of GameStop shares from ESMA on its Risk Dashboard is nothing new. In fact, as Finance Magnates reported in February, the EU’s securities market regulator warned over the increasing retail trading activities based on information gathered from social media forums and related to the GameStop saga. The regulator pointed out the so-called short squeeze witnessed in GameStop stocks was caused by retail traders who coordinated efforts through a Reddit subforum.

“ESMA urges retail investors to be careful when making investment decisions based exclusively on information from social media and other unregulated online platforms if they cannot verify the reliability and quality of that information,” the market regulator commented at that time.

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