ESMA sees Potential Decoupling of Financial Market Performance and Underlying Economic Activity

ESMA has published the first complete risk dashboard for 2020, which highlights the key risks in all areas of ESMA’s remit. The assessment remains at the same level as the separate risk update published by ESMA on April 2, 2020. 

During the first quarter of 2020, the equity markets saw very large corrections as a result of both the COVID-19 pandemic and the existing valuation risks. Despite the high uncertainty and worsening economic outlook, together with the massive public policy interventions in the EU and elsewhere, markets have since seen a remarkable rebound. 

As a result of this potential decoupling of financial market performance and underlying economic activity, ESMA has suggested that there may be a prolonged period of risk to institutional and retail investors of significant market corrections, with very high risks across the whole of ESMA’s remit. The extent to which these risks will materialize is likely to depend on two drivers:

• the economic impact of the pandemic; and 
• any occurrence of additional external events in an already fragile global economic environment.

ESMA’s first complete risk dashboard can be found here.