ESMA risk assessment update: Market environment deteriorates further

The risk to ESMA’s overall remit remains at the highest level, with political event risk, surging inflation and jumps in market volatility negatively impacting the outlook.

Following the invasion and the resulting sanctions, funds and investors with exposures to Russian assets have faced substantial valuation issues. There has been significant asset repricing, with riskier assets falling in value (particularly equities, corporate bonds and emerging market debt).

Prices of commodities and related derivatives have jumped sharply and are adding to pre-existing inflation pressures. This has led to increasing market expectations of higher interest rates and growing likelihood of far-reaching rebalancing of portfolios as investors adjust to the new environment. Finally, cyber risk is very high currently and remains a key concern for financial markets, as attacks targeting infrastructures and firms could be very disruptive.

ESMA also observes that crypto assets have experienced sharp falls in value, showing the importance of the recently published ESAs joint warning on crypto assets reminding consumers of the highly volatile and speculative nature of many crypto markets.  The collapse of Terra illustrates the acuteness of confidence effects in crypto-asset markets and the risks attached to so-called stablecoins in the absence of a sufficiently robust business models and financial engineering.