The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has detailed the key risk drivers currently facing EU financial markets as geopolitical events continue to heavily impact the financial system.
In its second risk monitoring report for 2025, the authority underscored the persistent structural risks that the union has to deal with.
In the first half of 2025, securities markets experienced pronounced volatility as global uncertainties intensified, notably with escalating trade conflicts.
The report highlights that investor risks have also risen in crypto-asset markets, where exuberance has been fuelled by political developments in the US and the emergence of new, high-risk business models.
Overall, ESMA sees high or very high risks in the markets within its remit, and retail and institutional investors should remain alert to potential sharp market corrections, and to the liquidity strains they could entail.
Verena Ross, ESMA’s Chair, commented on the findings. “We have recently seen strong volatility in most global markets, including for equities, bonds and crypto-assets,” she said.
“Whilst the situation has stabilised since March-April, global uncertainties remain,” Ross added.
She also warned that any unexpected geopolitical developments could risk driving sudden market corrections.
According to the report’s executive summary, following escalating trade conflicts and persistent geopolitical uncertainties, markets under ESMA’s remit experienced high volatility in the first four months of 2025 but demonstrated resilience throughout the first half of the year. Overall, risks persist at high or very high levels.
Policy uncertainty materialised in March and April 2025 with the US administration’s tariff announcements, as well as through the change in stance of German fiscal policy.
Short-term market movements were historically large, with sharp equity drawdowns and credit spread spikes, followed by a swift rebound in valuations amid sustained high volatility.
Going forward, the impact of tariffs raises concerns of market corrections, a weaker economic outlook, and inflationary pressures.
The report highlights that persistently elevated equity and crypto-asset valuations amplify the risk of market corrections, especially under very high market reactivity.
These risks are compounded by the increased likelihood of technological disruptions.
Ross added that the persistent growth and sophistication of cyber and hybrid threats amid heightened geopolitical tensions is amplifying the risks of operational disruptions to financial markets.
The report notes that rising cyber and hybrid threats increase the risks of technological disruptions, including in financial sectors, with associated risks of market reactions.
Recent incidents, such as an electricity blackout in the Iberian Peninsula and the T2S outage in the first quarter of 2025, highlighted operational vulnerabilities exacerbated by concentrated dependencies on information technology provided by relatively few firms.
In terms of market performance, EU equity market performance over the last months was characterised by high volatility, at levels not seen since the COVID-19-related market stress.
Equity valuations saw sharp falls and fast recovery in April related to the US tariff announcements.
Overall, EU market performance as of end-June stood at plus 11 per cent since the beginning of the year, amid significant sectoral heterogeneity.
For consumers, the report notes that confidence around future market conditions rebounded following a sharp dip in April, supported by the continued improvement of the aggregate financial position of households.
In the first half of 2025, consumers maintained a strong demand for bond funds, alongside a marked increase in equities and ETFs, as seen through retail transactions.
ESMA also raised concerns about investor protection, particularly for less sophisticated individuals.
Ross observed that in this environment retail investors are at risk of making poor trading decisions due to information overload or misinformation, a phenomenon particularly pronounced with social media and potential gamification of trading.
This risk stems from exposures to behavioural biases in investing, with social media, digital trading apps, and potential gamification elements potentially encouraging herd mentality and social contagion among investors.
The report also addressed structural developments, noting that while corporate bond issuance remained stable at historically high levels, corporate debt sustainability remains a concern.
Furthermore, the continued growth in the ESG bond market and robust green bond issuance reflect sustained investor appetite, even as the impacts and risks of tokenisation on markets still need to be fully understood.
