ESMA Warns of Highest Ever Financial Market Risks Amid Inflation and Geopolitical Tensions

The European Securities and Markets Authority (ESMA) has warned that financial market risks are at their highest level, driven by persistent inflation, rising market volatility, and heightened geopolitical risk.

In its latest risk assessment report, ESMA noted that the invasion of Ukraine by Russia and subsequent economic sanctions have significantly impacted EU financial markets. The regulator stated that the 'invasion and subsequent political and economic developments have since profoundly impacted the risk environment of EU financial markets.'

The report highlighted that valuation issues have arisen for funds and investors with exposures to Russian assets, with significant asset repricing occurring. Riskier assets such as equities, corporate bonds, and emerging market debt have fallen in value.

Inflationary pressures and rising inflation expectations are leading to a 'growing likelihood of far-reaching rebalancing of portfolios as investors adjust to the new environment.'