Middle East conflict triggers sharp rise in energy and commodity prices
The European Securities and Markets Authority (ESMA) published its first risk monitoring report of 2026 this week, warning that risks of market and systemic stress in European Union financial markets remain high despite resilient performance during the second half of 2025.
The report highlighted key risks and vulnerabilities across EU financial markets, noting that strong market performance in recent months has not eliminated underlying structural risks.
ESMA explained that its risk assessment for the second half of 2025 had been completed before the latest geopolitical shock, referring to the war in the Middle East that began in late February 2026.
However, the regulator said initial market reactions to the conflict confirmed the transmission channels and sensitivities previously identified.
According to the report, the likelihood of sudden and significant market price swings remains elevated, driven by rising geopolitical tensions, stretched equity valuations and an uncertain economic outlook.
ESMA also warned that increasing price correlations across asset classes are heightening the risk of contagion across markets, potentially amplifying the impact of financial shocks.
At the same time, cyber and hybrid threats targeting financial firms and market infrastructures continue to grow in scale and sophistication, raising the risk of operational disruptions.
“The recent escalation of conflict in the Middle East continues to significantly affect markets, leading to sharp increases in energy and commodity prices,” said ESMA chair Verena Ross.
“ESMA’s latest risk monitoring analysis highlights the potential for disorderly corrections that could spill over across markets,” Ross added.
Beyond its assessment of risks, the report analysed market developments across key segments.
The document included detailed analyses of selected structural issues, including EU sovereign bonds’ sensitivity to unexpected events and funds’ exposure to private finance.
In the area of securities markets and crypto-assets, ESMA said record-high global equity valuations increased the risk of corrections.
The regulator also said credit-quality signals in the EU remained mixed, with growing concerns surrounding the expansion of private credit.
ESMA noted that an October flash crash triggered an extended sell-off in cryptocurrency markets, although stablecoins continued to expand at a slower pace.
According to ESMA, financial firms are increasingly targeted by threats, while operational dependencies increase the risk that disruptions could spread across markets.
The authority reported that central securities depositories experienced a surge in settlement failures for exchange-traded funds in April.
In the asset management sector, ESMA said the growth of private finance funds contributes to funding the real economy, although greater monitoring is required due to concerns over opacity and interconnectedness.
From a consumer perspective, ESMA highlighted that investors continued shifting from active investment strategies to passive ones.
The regulator also warned that the growing influence of social media on younger investors increases the risk of market bubbles.
ESMA’s analysis found no clear evidence of a rise in company delistings, although it identified a persistent downward trend in IPO activity.
Finally, increased awareness of physical climate risks drove catastrophe bond issuance to record highs in 2025.
In the field of financial innovation, ESMA reported that the adoption of tokenisation in financial markets is gradually gaining momentum, specifically within money market funds.