ESMA escalates risk outlook

ESMA warns market, liquidity and contagion risks could rise amid Brexit fallout.

The European Securities and Markets Authority (ESMA) has deteriorated its risk outlook, as it warns market, liquidity and contagion risk could rise in the near future.  

ESMA’s latest risk dashboard explained that “political and event risks have intensified, and the macroeconomic environment may deteriorate.”

The risk deteriorated following slight improvement in the second quarter this year, which was reversed following the UK referendum.

Overall risk levels remain high following the UK’s decision to leave the European Union, which saw equity, bond and currency markets “react strongly”, ESMA said.

The risk report explained: “As political developments post-referendum unfold, market turbulences may continue to occur.”

ESMA said the uncertainty regarding future economic outlook was a result of key aspects yet to be negotiated over the coming months, and possibly years.

“Business strategies and market structures may adjust to the new political realities in the months and years to come,” the report added.

The report also outlined potential for “sudden liquidity evaporation” as ESMA increased its liquidity risk level.

It said risks of a sudden change in market confidence and liquidity deterioration ‘linger’, despite the slight improvement in fixed income market liquidity.