Heightened geopolitical uncertainties drive risks

Geopolitical events continue to have a strong impact on the evolution of financial markets. In the first half of 2025 securities markets experienced pronounced volatility as global uncertainties intensified, notably with escalating trade conflicts. 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, andretail and institutional investors should remain alert to potential sharp market corrections, and to the liquidity strains they could entail.

Verena Ross, ESMA's Chair, said:

"We have recently seen strong volatility in most global markets, including for equities, bonds and crypto-assets. Whilst the situation has stabilised since March/April, global uncertainties remain. Any unexpected geopolitical developments could risk driving sudden market corrections.

Furthermore, the persistent growth and sophistication of cyber and hybrid threats amid heightened geopolitical tensions is amplifying the risks of operational disruptions to financial markets.

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."

Beyond the general risk drivers, ESMA's report provides an update on structural developments and the status of key sectors of financial markets, during the first half of 2025.

Market monitoring

Markets: 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 +11% since the beginning of the year, amid significant sectoral heterogeneity. In fixed income markets, escalating trade tensions led to a significant widening of corporate bond spreads in early April, particularly in the high-yield (HY) segment. Market metrics of credit quality worsened in April with the geopolitical developments, and Moody's downgraded the US to Aa1 in May. Despite a 10% drop in valuation in 1H25, crypto markets remain near their historical peak volume at EUR 3tn. The US administration's approach to crypto-assets has boosted investor sentiment. However, there are growing concerns that potential conflicts of interest may add to existing issues related to governance, credibility, and money laundering in these markets.

Asset management: In 1H25, EU funds experienced their highest episode of volatility since the COVID-19 outbreak but exhibited positive performance amid muted flows. While funds have been overall resilient, leverage and liquidity risks persist in parts of the sector. In the real-estate fund sector, market prices seem to have bottomed out, but real-estate funds continued to experience sustained outflows in some jurisdictions. In this context, ESMA and the IMF performed a stress test showing the resilience of funds to a market shock but potential spillovers to the underlying bond markets.

Consumers: Confidence around future market conditions rebounded following a sharp dip in April, supported by the continued improvement of household finances. In 1H25, consumers maintained a strong demand for bond funds, alongside a marked increase in purchases of equities and ETFs. The demographic profile of consumers suggests that older investors have a higher share of fixed income investments in their portfolios. Overall, consumer complaint levels remained steady.

Infrastructures and services: Cyber risks continued to rise globally amid ongoing geopolitical tensions. In addition, operational vulnerabilities were exposed through recent incidents, such as the blackout in the Iberian Peninsula and the T2S outage in 1Q25, even though they did not lead to systemic impacts. Equity-trading volumes increased significantly in 1H25 (+23% year-on-year), with March seeing record-high activity.

Structural developments

Market-based finance: The financing of European corporates via equity markets slowed toward the end of 2024 and remained muted in 1H25. Despite expectations of a recovery in 2025, the EU initial public offering (IPO) activity has remained subdued. Corporate bond issuance remained stable at historically high levels, with significant amounts of debt due to mature over the next five years. Corporate debt sustainability remains a concern, as highlighted by the recent widening of spreads particularly in the HY segment.

Sustainable finance: Despite shifting policy perceptions, record climate extremes are adding pressure to the global low-carbon transition. While EU ESG funds saw small net outflows in 1Q25, demand for ESG fixed-income strategies remains strong. Continued growth in the ESG bond market and robust green bond issuance reflect sustained investor appetite. Meanwhile, new ESMA guidelines on ESG fund naming are driving greater alignment between fund names and investments, contributing to market integrity and reduced greenwashing risks.

Financial innovation: Tokenisation has had limited adoption so far, but tokenised funds have seen some uptake recently. The impacts and risks of tokenisation on markets still need to be fully understood. Asset managers' bets on the AI theme have continued into 1H25 with the launch of new AI-sector investment funds. Though still limited in deployment, agentic AI poses supervisory challenges around accountability, explainability, misalignment, and systemic risks - intensified by social media and multi-agent interactions.

Further information:

Solveig Kleiveland

Team Leader - Communications
[email protected]