European market regulators are concerned about this.About everything

Market dynamics

Before the summer tanning in continental Europe has subsided, the happy soul of the European Securities and Markets Authority has fallen. 110 page report, Partly dedicated to outlining risks to investors based on observations in the first half of this year.

Most bears have conceded defeat, abandoned their predictions of doom, and learned to like or at least accept a rally in risky assets, which does not seem to be affected by severe news, scattered data and high valuations. Esma seemed reluctant to cover up these cracks.

“We expect that institutional and retail investors will continue to face further-possibly significant-long-term risks of market adjustments, and the risks across Esma are very high,” it said.

Most market predictions come from people with spine: investors talk about their accounts, consciously or unconsciously, bank analysts are stubborn and hard to disagree with, and so on. Therefore, as long as market participants follow the rules and the financial system is functioning normally, it is useful to accept the analysis of an institution that is not interested in stocks, bonds, or any other direction. With this in mind, here it is.

Esma certainly noticed this. In the first half of this year, risk assets began to recover after the initial Covid shock in 2020, and the recovery momentum is amazing. The global economic rebound has pushed up commodity prices.

The valuation of EU stocks is higher than the prevailing level before the pandemic, and despite the increase in corporate borrowing, even the riskier “high-yield” corporate bonds are soaring. According to an index run by Ice Data Services that covers debt with a maturity of just over three years, given that the average yield of such bonds in Europe is 2.4%, it can be said that they need a new name.

But what connects all of this is the rise in unobviously healthy risk-taking behaviors, the most obvious being like GameStop retail stock trading frenzy The ups and downs of the U.S. and cryptocurrency markets at the beginning of this year.

Given the stark pursuit of upward-sloping important charts by market novices, it is hard to believe that meme stock trading or the hissing cryptocurrency excitement will end.But Esma also conducted a name check on the victims of excessive in the wholesale market: Supply Chain Finance Corporation Greenhill, Applied for management in March, private investment company Archegos Implosion The same month.

Esma said that, in general, these events “raised questions about the increase in risk-taking behavior and possible market prosperity.” “Therefore, there are still concerns about the sustainability of current market valuations, and current trends need to show flexibility over a longer period of time in order to conduct more active evaluations.”

The problem here is that Esma has already answered its own question. These trends do show that they are resilient throughout the year. It is easy for fund managers to spot red flags in every corner. It is worthwhile for regulators to pay close attention to these red flags, but they are irrelevant as long as the market continues to rise.

Of course, these warnings are not alone. Also this week, Richard Bernstein, CEO of Richard Bernstein Consulting, described the current market environment as “probably the biggest bubble in my career.”

“So when will the bubble burst? The answer is no one knows. Our portfolio still focuses on the conservative side… Cyclical stocks of energy, materials, finance, industry and smaller capital. The entire market does not seem to be necessarily in place. At risk, but a momentum strategy focused on market bubble leadership seems risky to us,” he said.

Despite inflationary panic, slowing growth, the Delta variant of the coronavirus, Beijing’s disruptive suppression of foreign-listed stocks and the rewrite of U.S. foreign policy at the beginning of this year, the S&P 500 benchmark U.S. stock index fell more than 2% in a day , It happened 3 times this year, and it hasn’t happened at all in the past four months.

Central banks headed by the Federal Reserve have made it clear that they are wary of the risk of inflation exceeding the target level and staying at that level, but unless they are convinced that economic data needs to do so, they are not eager to withdraw monetary support.

Some investors are getting nervous.Use borrowed money to increase bet returns in the U.S. Has refused The first year since the pandemic hit last year.Exchange-traded funds that aim to perform well in a more severe economic or market environment have attracted Unusually strong demand. Now there are more and more institutional fund managers Writing options In their own holdings or investment portfolios, allow others to bet that the stock can continue to rise. Essentially, this is a way for fund managers to say that they don’t want to sell, but they also think that quick returns are in the rearview mirror.

But this is mainly to repair at the edge. A more cautious voice shouted in the void.

katie.martin@ft.com

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