ESMA Flags Heightened Geopolitical Uncertainty as Driver of Market Risks

Key Takeaways

• Geopolitical Drivers: Escalating trade conflicts and global uncertainties drove market volatility in the first half of 2025, with equities, bonds, and crypto-assets all experiencing sharp swings.
• Crypto Concerns: Despite a 10% drop in value, crypto markets remain near €3 trillion, with political developments in the U.S. boosting sentiment but raising governance and money laundering risks.
• Fund Sector Resilience: EU funds weathered their most volatile period since the pandemic, but leverage and liquidity risks persist, and real estate funds continued to face outflows in some jurisdictions.
• Operational Vulnerabilities: Rising cyber and hybrid threats, combined with incidents such as the Iberian Peninsula blackout and T2S outage, highlight ongoing risks to financial market infrastructures.
• Debt and ESG Trends: Corporate debt sustainability remains a concern, while strong demand for green bonds and new ESMA guidelines on ESG fund naming aim to reduce greenwashing risks.

Deep Dive

The European Securities and Markets Authority (ESMA) has issued a warning in its latest risk monitoring report, showing that geopolitical tensions, cyber threats, and volatile investor sentiment are combining to keep risks in EU financial markets at high or very high levels. The findings, published in ESMA’s second risk report of 2025, point to vulnerabilities across equities, bonds, crypto-assets, and the wider financial infrastructure.

Verena Ross, ESMA’s Chair, cautioned that although markets have steadied since the spring, the backdrop remains precarious.

“We have recently seen strong volatility in most global markets, including for equities, bonds and crypto-assets. Whilst the situation has stabilized since March/April, global uncertainties remain. Any unexpected geopolitical developments could risk driving sudden market corrections,” she said. Ross also underscored the growing role of cyber and hybrid threats, which she noted were amplifying operational risks for financial markets at a time when retail investors may be more vulnerable to misinformation and the gamification of trading.

The first half of 2025 was marked by turbulence not seen since the pandemic-era shocks. EU equities swung sharply in April on the back of U.S. tariff announcements, but by June had climbed 11% year-to-date. Credit markets were more fragile, with spreads widened in the high-yield segment and Moody’s downgrade of U.S. sovereign credit in May rattled sentiment further. Crypto-assets mirrored this volatility, losing 10% in value yet still hovering near a historic €3 trillion market size. ESMA flagged concerns that the sector’s exuberance, fueled by U.S. political developments, is masking unresolved issues of governance, conflicts of interest, and money laundering.

Funds, Consumers, and Infrastructure Under Strain

Asset managers faced their most volatile stretch since COVID-19 but generally held firm, with funds delivering positive performance despite muted flows. Real estate funds were an exception, continuing to bleed assets even as property prices appeared to stabilize. Stress tests conducted with the IMF confirmed the resilience of the wider fund sector but revealed potential spillovers to underlying bond markets.

Consumers, meanwhile, regained confidence after April’s dip, buoyed by stronger household finances. Investors sought safety in bond funds but also moved into equities and ETFs, with older investors maintaining a preference for fixed income. Complaints remained stable despite the uncertain environment.

That backdrop of relative resilience was offset by rising operational threats. Cyber risks intensified through the first half of the year, with incidents such as the Iberian Peninsula blackout and a T2S outage exposing the fragility of market infrastructure, even if systemic consequences were avoided. At the same time, equity trading volumes surged, with March hitting record levels, adding further pressure on systems.

Structural Shifts in Finance, Sustainability, and Innovation

The broader picture is one of gradual structural change. Corporate financing through equity markets remains subdued, while bond issuance continues at historically high levels, raising concerns over debt sustainability as large volumes mature in the coming years. In parallel, sustainable finance continues to expand, and net outflows from ESG funds in early 2025 contrasted with robust appetite for ESG and green bonds, as investors sought climate-related strategies. ESMA’s new rules on ESG fund naming are beginning to curb greenwashing and restore investor trust.

Innovation is another frontier under watch. Tokenization remains niche but is showing early signs of adoption in fund structures, while asset managers have launched new funds tied to the AI theme. ESMA warned that the growing sophistication of agentic AI brings supervisory challenges around accountability, explainability, and systemic risks, particularly as these models interact with social media and potentially reinforce herd behavior in markets.

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