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Market and credit risks remain high in Q1

Uncertain EU and global economic outlooks keep liquidity risk at high levels, according to a first quarter report by the European Securities and Markets Authority (ESMA), which has published its Risk Dashboard for Q1 2016

ESMA stated that the overall risks to securities markets in Q1 2016 remained unchanged at high levels, with market and credit risks being very high. It noted: “This was reflected in major price swings in global equity markets, especially affecting financial institutions at the beginning of Q1 2016, and high volatilities across market segments. Corporate bond spreads increased substantially, especially for lower rated bonds, before moderating at the end of Q1 2016. Key risk sources were mostly related to the uncertain EU and global economic outlook, commodities price dynamics and global financial developments.”

Emerging markets pose contagion risk

The report also stated that ongoing investor uncertainty was keeping liquidity risk high, while contagion risk is also high. The main drivers of the latter include financial market interconnectedness related to the exposure of EU financial and non-financial sectors to emerging markets and the commodities sector as well as increased interconnectedness of the fund sector with the rest of the financial system.

ESMA also reported that systemic stress increased during the first part of Q1 before easing in March 2016. This was mainly driven by bond and equity market dynamics.

CTMfile take: Whichever way you look at it, there is huge uncertainty across financial markets, with many corporates feeling the pressure on their financing sources. Added to that, exposure to emerging markets is also creating weakness in the EU.

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