The RD highlights that the main risk for EU financial markets remains that posed by a sudden risk reassessment, amid the general decoupling of securities prices from economic fundamentals, and it maintains its risk assessment at a very high level.
Risk summary
Valuations in EU financial markets for most market segments are now at or above levels compared to pre-COVID-19 levels. They remain highly sensitive to events and volatile, as shown by the recent Gamestop related market movements and news on potential slow roll-out of vaccines driving equity prices. Fixed income valuations, notably for IG and HY corporate bonds are now far above their pre-COVID-19 levels, in part due to the continued monetary policy support. A sudden risk reassessment amid the general decoupling of securities prices from economic fundamentals remains the main risk for EU financial markets and we thus maintain our risk assessment. Credit risk is likely to increase further due to increasing corporate and public debt levels. Going forward, we see 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 the ESMA remit. The extent to which these risks will further materialise will critically depend on market expectations on monetary and fiscal policy support as well on the pace of the economic recovery...
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