European Regulator Warns Investors of Price Bubble Risks

September 13, 2017

Very low interest rates and political uncertainty imply the highest level of risk for price bubbles, warned the European financial markets regulator, specifying that uncertainty is generated by the “political calendar of the European Union,” as well as U.S. politics and geopolitical events.

Market and credit risks are very high, warned the European Securities and Markets Authority (ESMA) in a report published on Tuesday.

The risk related to asset valuation is “very large due to financial weakness and geopolitical uncertainty,” emphasized ESMA.

– The most significant source of risk remains the uncertainty related to Brexit, state the authors of the ESMA report.

– We expect that in 2017, the main risk generators will be the EU political calendar, including Brexit negotiations, as well as trends in U.S. politics and geopolitical events, the report states.

They also identified inflated asset prices and cyberattacks as potential problems, pointing to the danger of risk spillover to other parts of the financial sector.

Their warning is unusually sharp, notes Reuters, but also relevant as the agency has deep insight into markets across all 28 EU countries.

It reflects concerns that some bankers have long expressed, notes Reuters, reminding that Deutsche Bank CEO John Cryan already warned last week of the danger of price bubbles forming in equity, bond, and other asset markets, urging the ECB to change its cheap money policy.

The message from ESMA, however, strongly contrasts with those delivered last week by European Central Bank (ECB) President Mario Draghi, who sought to calm fears of market overheating, notes Reuters.