Initial Impact of COVID-19 on European Capital Markets

During these unprecedented times in light of the COVID-19 outbreak, European capital markets have continued to intermediate market liquidity and facilitate risk management for corporates and investors. The purpose of this report is to provide a snapshot of the initial impact of COVID-19 on European capital markets activity.

Capital markets resilience

As this report shows, European capital markets have continued to operate well and serve their function during times of stress.

  • While working remotely, issuance of investment grade corporate bonds surpassed 50bn EUR in the first week of April; this was also the highest weekly amount ever issued in Europe. French companies have been particularly active.
  • Non-financial corporates have also rapidly increased secondary equity offerings in an effort to raise cash buffers and withstand business closure for several weeks.
  • Markets are more volatile than a few months ago, which has made it costly for some companies to list through IPOs. IPO issuance on European exchanges has declined 83%YtD compared to a year ago.
  • Encouragingly, markets have continued to play their role in providing liquidity, price formation, timely clearing and settlement procedures, capital allocation and helping investors manage their portfolios. Equity trading rose 94% YoY in March-20, corporate bond trading increased 31% YoY in Q1 2020, and FX spot trading rose 61% YoY in March-20. Settled transactions at the ECB’s T2S platform have increased to over 1 million on average per day since 24 February from a 600,000 daily on average in 2019.

The rapid increase in securities trading and post-trade activity has been carried out without any major disruption from a business continuity perspective.

  • Securitisation secondary markets have, however, suffered disproportionate reductions in liquidity due to central bank support which is more limited in scope and slower and more difficult to access than for other fixed income sectors.

COVID-19 is stress-testing the entire financial system and its institutional architecture

The unexpected economic consequences of the COVID-19 outbreak are testing the coordination and speed of response of European and national institutions: monetary policy coordination, fiscal response, financial supervision, as well as global prudential and markets regulatory coordination.

The COVID-19 shock is also a real time test of the resilience of the banking sector to absorb simultaneously, a wide variety of shocks: credit risk, market volatility risk, and operational business continuity, while still supporting the real economy.

As section 7 of this report shows, banks interacting in the European market are well-positioned from a solvency and liquidity perspective to support households and businesses during this period of abnormal economic pressure, although with ongoing profitability concerns for some market participants which pre-date the current COVID economic environment.

AFME’s approach to COVID-19

COVID-19 has had significant implications for our members globally with many having to reallocate resources to focus on managing business continuity issues.

AFME remains engaged with policy makers across Europe, ensuring we are communicating on the wide set of policy and operational issues our members are facing in the current environment.

As summarized in section 8, AFME is working together with our members and regulators to ensure that markets remain open, well-functioning and liquid in light of the market impact of COVID-19.

AFME will continue to assess the implications of COVID-19 for our members and to engage with authorities across Europe.

Full Report

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