EU Markets Enter 2026 Under Elevated Risk Pressure, ESMA Warns

Key Takeaways

• Elevated Market Risk: ESMA says the risk of market and systemic stress remains high despite resilient performance in the second half of 2025.
• Geopolitical Tensions Amplifying Volatility: The escalation of conflict in the Middle East has already triggered spikes in energy and commodity prices and added pressure to markets.
• Valuations Raise Correction Concerns: Record-high global equity valuations increase the likelihood of sudden and disorderly price swings.
• Cyber and Operational Risks Growing: Financial infrastructures face rising cyber and hybrid threats that could disrupt market operations.
• Structural Shifts Continue: Declining IPO activity, strong ETF inflows, and growing catastrophe bond issuance highlight deeper changes in financial markets.

Deep Dive

A new risk monitoring report from the European Securities and Markets Authority suggests that despite resilient market performance in the latter half of last year, the conditions that could trigger market stress have not disappeared. If anything, they are becoming more complex.

The regulator’s analysis was completed before the latest escalation of conflict in the Middle East in late February, but early market reactions to the conflict appear to reinforce many of the vulnerabilities ESMA had already identified. The sudden surge in energy and commodity prices, alongside renewed volatility across markets, illustrates how quickly geopolitical events can ripple through financial systems.

“The recent escalation of conflict in the Middle East continues to significantly affect markets, leading to sharp increases in energy and commodity prices, as well as elevated volatility,” said ESMA Chair Verena Ross.

“ESMA’s latest risk monitoring analysis highlights the potential for disorderly corrections that could spill over across markets. In this context, disciplined risk monitoring and risk management remain essential to ensure orderly markets, a core objective for ESMA.”

Markets Performing Well but Vulnerabilities Persist

The report paints a picture of markets that have held up well on the surface while underlying risks continue to build.

Global equity valuations reached record highs through the second half of 2025 and into early 2026. Strong returns helped support equity fund performance, particularly for funds with growing exposure to U.S. markets. But elevated valuations also leave markets more vulnerable to sudden shifts in sentiment.

ESMA notes that correlations across asset classes have been rising, a dynamic that can accelerate contagion during periods of stress. When multiple markets begin moving together, losses in one area can spread more quickly into others.

Bond markets offered mixed signals. Sovereign spreads across Europe narrowed relative to Germany, suggesting investors maintained confidence in government debt. At the same time, liquidity conditions weakened slightly as economic uncertainty lingered.

Elsewhere, credit indicators across the EU presented an uneven picture, with growing concerns linked to developments in U.S. private credit markets.

The report also points to turbulence in digital asset markets. A flash crash in October triggered an extended downturn in crypto prices, although stablecoins continued expanding, albeit at a slower pace.

Meanwhile, parts of the financial system’s infrastructure showed signs of strain during the period under review. Central securities depositories recorded a surge in settlement failures involving exchange-traded funds in April, followed by disruptions affecting UCITS funds and equities later in the year.

Operational resilience remains a growing concern for regulators. Financial firms and market infrastructures are increasingly exposed to cyber and hybrid threats, which could disrupt trading or settlement systems and amplify broader market shocks.

Retail Trends and Structural Changes

The report also highlights longer-term shifts shaping Europe’s investment landscape. Passive investing continues to gather momentum, with exchange-traded funds attracting strong inflows as investors move away from actively managed strategies.

At the same time, regulators are paying closer attention to how social media influences retail investing behavior, particularly among younger investors. Online-driven trading trends can amplify speculative activity and increase the risk of asset bubbles.

Leveraged retail products such as “turbos” also drew scrutiny, with ESMA noting that these instruments frequently generate negative outcomes for retail investors.

Capital Markets and Climate Finance

Europe’s public equity markets remain under pressure. IPO activity continued to decline during 2025, contributing to weak overall equity issuance, while secondary offerings provided only modest support.

Despite concerns about companies leaving public markets, ESMA said its analysis did not find clear evidence of a broader wave of delistings.

Meanwhile, sustainable finance trends are evolving in different directions. A cooling in global climate policy sentiment weighed on ESG investing, even as regulatory initiatives aimed at improving transparency moved forward.

One area experiencing strong growth is catastrophe bonds. As awareness of physical climate risks rises, issuance of these instruments reached record levels in 2025, with European funds increasingly offering exposure.

Innovation Still Emerging

Financial innovation remains a longer-term theme rather than an immediate driver of risk.

Tokenisation adoption remains limited but is gradually gaining momentum, including through the emergence of tokenised money market funds. Interest in quantum computing applications is also increasing across the financial sector, though the technology remains experimental and far from widespread commercial use.

The ESMA’s analysis suggests that while financial markets have shown resilience in recent months, they are operating in an environment where geopolitical tensions, technological change, and structural market shifts are creating new sources of vulnerability.

For regulators, the challenge is ensuring that markets remain orderly even as those pressures continue to build.

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