ESMA published the risk dashboard for the third quarter of 2020. The dashboard shows that financial markets in EU continued their recovery in the third quarter of 2020 but remain highly sensitive, as the recent volatility spikes around COVID-19 developments and uncertainties around the US election outcomes show. Credit rating downgrades have been slowing and investment funds recorded inflows across asset classes, especially for bond funds. Looking ahead, ESMA sees a prolonged period of risk to institutional and retail investors of further, possibly significant, market corrections and see very high risks across the whole of ESMA’s remit. The low-for-long interest rate environment is also expected to weigh on the profitability and solvency of banks and insurers.
During the third quarter of 2020, EU financial markets continued their recovery and equity market valuations edged up further. There are increasing signs of strong geographical and sectorial differentiation across financial markets, with fixed-income markets seeing large-scale valuation increases across various segments such as emerging markets, investment grade, and high yield. These developments, taken together, highlight the ongoing risk of decoupling between asset valuations and economic fundamentals. Thus, the potential for a sudden reversal in investor’s risk assessment is the key risk currently seen for EU financial markets and ESMA maintains its risk assessment. The extent to which the identified risks will further materialize will critically depend on three drivers:
- Economic impact of the pandemic
- Market expectations on monetary and fiscal support measures
- Any occurrence of additional external events in an already fragile global environment
Keywords: Europe, EU, Banking, Securities, Risk Dashboard, COVID-19, Credit Ratings, Credit Risk, Market Risk, ESMA
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