EU markets watchdog says stocks rebound out of kilter with COVID-hit economy

LONDON (Reuters) - Stock markets face possibly significant corrections after rebounding beyond their coronavirus-hit economic fundamentals, the European Union’s securities watchdog said on Wednesday.

The European Securities and Markets Authority (ESMA) said there has been a “potential decoupling” of financial market gains and an economy hit by the COVID-19 pandemic, raising questions about the sustainability of the current market rebound.

ESMA said its latest “trends, risks and vulnerabilities” report continued to see very high risks in markets.

Stock markets surged by 40% in the euro area since a trough in mid-March when economies went into lockdown to fight the pandemic and economies went into recession. The IMF expects a drop of more than 10% in euro zone GDP this year, with only a mild recovery in 2021.

There is a “prolonged period of risk to institutional and retail investors of further - possibly significant - market corrections”, the EU watchdog said.

“The impact on EU corporates and their credit quality, and on credit institutions, are of particular concern.”

ESMA’s report also looked at whether new EU rules that require brokers to itemise charges for research on stock picks and executing trades, known as unbundling, will improve transparency for clients.

Critics have said it would lead to a dearth of research on smaller, less high profile stocks, but ESMA said in its report on Wednesday that its analysis “does not find material evidence of harmful effects from the unbundling rules”.

Reporting by Huw Jones, Editing by Jacqueline Wong