ESMA sees high risk of decoupling of the financial market from the underlying economic activity

Oct 30, 2020 Benn-Ibler Rechtsanwälte

In the course of the publication of the "Trends, Risks and Vulnerabilities (TRV) Report of 2020" the European Securities and Markets Authority (ESMA) commented on the effects of the COVID-19 crisis on the markets. In particular, it underlined the risk that the performance of the financial markets will move further away from the real market performance.

While the COVID-19 pandemic led to massive corrections on the capital markets in the first quarter (Q1) 2020, Q2 saw a remarkable recovery due to government intervention. Since the low point in March 2020, the stock markets in the eurozone grew by 40%, almost reaching pre-crisis levels. In contrast, the International Monetary Fund (IMF) expects global GDP and the GDP of the eurozone to fall significantly this year and only recover slightly in 2021.

The ESMA assumes a fragile market environment and thus ongoing risks in its area of responsibility. It sees a prolonged period of risk for institutional and retail investors, which may result in significant market corrections. The extent to which these risks may materialize depends on two factors: the economic impact of the pandemic and the additional external uncertainties associated with a fragile global market environment. Of particular concern is the impact on companies and credit institutions in the European Union (EU) and their credit ratings.

ESMA, Press release (2 Sep 2020)