ESMA report warns on increasing risks of market exuberance

The European Securities and Markets Authority (ESMA) published its second Trends, Risks and Vulnerabilities (TRV) Report of 2021. It highlights the continued rise in valuations across asset classes in an environment of economic recovery and low interest rates, the increased risk taking of investors and the materialization of event risks such as GameStop, Archegos and Greensill.

ESMA continues to see elevated risks and fragile fundamentals, with an outlook for continued high risk and uncertainty over the sustainability of corporate and public debt as well as rising inflation expectations. Current market trends need to show their resilience over an extended period of time to allow for a more positive risk assessment.

The extent to which these risks will materialize will critically depend on market expectations on the continuation of monetary and fiscal policy support, as well as on the pace of the economic recovery and on inflation expectations.

Increased risk-taking behaviour

Investor confidence has increased, linked to rising asset valuation and strong performance of retail investor instruments. A surge in retail trading since the onset of the COVID-19 pandemic has been driven by a range of factors, including innovation.

New online and mobile trading platforms offer convenient, easy-to-use investment services, and zero-commission business models and gamified features may further attract consumers. These features can prompt investor protection concerns, as does the rise of trading encouraged by social media and online message boards.

Also, rising valuations across classes, massive price swings in crypto assets and event-driven risks observed amid elevated trading volumes raise questions about increased risk-taking behaviour and possible market exuberance.

In addition to its risk monitoring, there are in-depth articles looking at financial stability risks, one of them highlighting cloud outsourcing. This article analyses the growing use of cloud service providers by financial institutions and how the concentration of those providers can create financial stability risks in case of outage.

Read the full report

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