EU financial markets enter 2026 amid high-risk environment
The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published today its first risk monitoring report of 2026, outlining the key risks and vulnerabilities in EU financial markets. ESMA finds that risks of market and systemic stress remain high despite resilient market performance in the second half of 2025.
Our risk assessment for the second half of 2025 has been completed well before the current shocks to the global economy from the war in the Middle East commenced in late February this year. Yet first market reactions in the EU and elsewhere to that war underline the transmission channels and sensitivities we have highlighted in our risk monitoring.
The likelihood of sudden and significant market price swings continues, driven by increasing geopolitical tensions, stretched equity valuations, and an uncertain economic outlook in the EU. Rising price correlations across asset classes heighten contagion risk while cyber and hybrid threats continue to grow in scale and sophistication, increasing the risk of operational disruptions in financial markets.
Verena Ross, ESMA’s Chair, said:
“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.
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.”
Beyond the risk drivers, ESMA’s report sets out market developments and conditions across key segments of EU financial markets during the second half of 2025. It also provides deep dives on selected topics such as EU sovereign bonds’ sensitivity to unexpected events, funds’ exposure to private finance, EU listings trends, and physical risk and catastrophe bonds.
Market developments
Securities markets and crypto-assets
Record-high global equity valuations in the second half of 2025 and early 2026 increased the risk of disorderly market corrections. European sovereign bond spreads versus Germany narrowed, although liquidity weakened slightly amid macroeconomic uncertainty. At the same time, credit-quality signals in the EU remained mixed, with growing concerns especially around US private credit. The October flash crash triggered an extended sell-off in crypto markets, although stablecoins continued to grow, albeit at a slower pace.
Infrastructures and services
Financial firms and infrastructures are increasingly targeted by cyber and hybrid threats and vulnerable to operational dependencies likely to propagate shocks. CSDs experienced a surge in settlement fails for ETFs in April, and UCITS and equities in August and September.
Asset management
Equity funds saw strong performance. This was largely driven by valuations, through increased exposure to the US market. The growth of private finance funds contributes to the funding of the real economy, but requires monitoring given opacity and interconnectedness concerns.
Consumers
As investors continued shifting from active to passive strategies, ETF inflows remained high. The growing influence of social media on younger investors increases bubble risks, while leveraged products, such as turbos, often deliver negative returns for retail investors.
Structural developments
Market-based finance
Equity issuance remained weak as IPO activity continued to decline and secondary offerings provided limited support. ESMA’s analysis found no clear evidence of rising delistings in Europe, but it highlighted a persistent downward trend in IPOs.
Sustainable finance
A cooling in global climate policy sentiment weighed on ESG investing, even as ESMA’s fund naming guidelines improved portfolio transparency. Meanwhile, rising awareness of physical climate risks drove catastrophe bond issuance to record highs in 2025, with EU funds increasingly offering exposure to these instruments.
Financial innovation
Tokenisation adoption remained low but gained momentum, including with the growth of tokenised money market funds. Interest in quantum computing applications increased, although applications remain experimental and far from commercial use.
Further information:
Ana Dilaverakis
Communications Officer
press@esma.europa.eu