ESMA warns that Brexit and the US-China trade war are still causing a lot of volatility

From: RegTech Analyst

Massive geopolitical events continue to stir up a lot of financial market volatility, according to the EU’s leading financial markets watchdog.

The European Securities and Markets Authority (ESMA) has warned in a new report that financial market risks “remained very high in the second half of 2019, due to excessive asset valuations in the context of weaker growth prospects, looser monetary policy and continuing uncertainties such as those on Brexit and on US-China trade relations.”

It added that equity markets have experienced recurring episodes of volatility and bond spreads tightened in signs of continuing search-for-yield.

It is hardly as surprise that Brexit is causing a lot of market uncertainty. In the weeks gone by, it has been reported that the UK exodus has complicated the EU’s budget plans, that the EU is planning to remove all the concessions made to Britain in the Markets in Financial Instruments Directive (MiFID II) and that there might even be a MiFID III in the works.

It has also seen German challenger bank N26 announce that it is pulling out of the UK, blaming the closing its accounts on the regulatory complications brought on by Brexit. Although, both the founders of rivals Monzo and bunq have hinted that N26’s abandoning the UK market might be more due to its inability to drum up enough customers on the British Isles.

In terms of the US-China trade war, the two nations reached a major milestone when signing a preliminary deal. That being said, some trickier issues are still left unresolved.

Although, while the low-intense hostilities between the two super powers might be cooling down, The Wall Street Journal has warned that a new conflict might be brewing between the US and India as Indian prime minster Narendra Modi seeks to emulate the success of China by growing its protection for its domestic firms.

ESMA also noted that credit and liquidity risk still remained high at the end of 2019. “Credit risk, in particular, remains elevated with deteriorating corporate debt quality and increasing risks of fallen angels (bonds being downgraded to below BBB) as the share of BBB-rated debt grows,” ESMA wrote in a statement.

Consumer risks are also a continuing concern as retail investors were still cautious and predominantly allocated their savings to bank deposits.

The report also looked at how EU funds risk exposure to potential bond downgrades. The regulator has simulated the impact of a wave of downgrades of fallen angels on bond funds and finds that the direct impact would moderately affect fund performance.

ESMA also looked at the impact big tech firms’ interest in launching more financial services could have on the market. The regulator concluded that more regulatory cooperation is needed to manage financial stability risks that could arise as tech titans increase market concentration.

FinTech Global made an in-depth look into this final topic in October 2019 after Uber became the latest big tech company to launch a financial solution. Our research revealed that while there are certainly huge risks associated with major tech companies reaching for even greater market shares, those risks also comes attached to significant opportunities.

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