UBS Warns of EU “Time Bomb”

It’s rare you get the head of one of the world’s largest financial institutions talking so bluntly about the EU and global economy.  The chairman of UBS, Axel Weber was speaking to the International Institute of Finance in Tokyo last weekend and, courtesy The Financial Times, he firstly warned that the EU was not “out of the woods” despite the Macron victory:

“Mr Weber said that political risk in Europe remained “actually quite high” even though “we’ve seen the centre hold in France” with Macron’s victory over far-right candidate Marine Le Pen, and even though all the signs were that the centre will also hold in the upcoming German location elections. “That doesn’t mean Europe is out of the woods,” he told the International Institute of Finance’s spring meeting. “There is still Italy where it is very unclear that the centre will hold. And there is still Greece.” He continued: “Where you find some bright side….there are (also) some downside risks that are not really priced into the market but could derail (Europe).” “Brexit is a time bomb… and the countdown is on. It will be two years from now,” Mr Weber said. He added that “if the British really do leave the customs union and single market there could be a lot of volatility which could impact on the global economy”.”

As a reminder, Weber is not a Wall Street banker, his heritage is ex ECB policy maker and president of Germany’s central bank, Bundesbank.  He knows Europe intimately.

To reinforce this view an equally blunt German Finance Minister yesterday said:

“So far we managed to hold together the EU after the Brexit decision, but the pendulum is swinging back” and on France that Macron “faces terribly difficult decisions”.  

This comes as last night the ECB chief Mario Draghi declared the Euro area is “clearly improving” but it’s “too early to declare success on growth” reflected of course in maintaining a negative cash rate of -0.4%... clearly a sign of everything being awesome?

Last year Weber spoke on a meeting of the IMF and World Bank where he famously had this to say about the global market more broadly:

“"They (central banks) have taken on massive interventions in the market, you could almost say that central banks are now the central counterparties in many markets. They are the ultimate buyer,"

"Investors have been driven into investments where they have very little capability for dealing with what is on their plate and I think that is a sure reminder of where we were in a different asset class in 2007," he said.

"So I think the central bankers need to be very careful that they do not continue to produce disturbances in the markets, which they acknowledge - it's a known side effect - but the perception that the underlying impact of monetary policy outweighs the potential side effect in my view is starting to be wrong," he added.

Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Federal Reserve has since looked to unwind its own policy which focused on the Treasury market and the yield curve, but the Bank of Japan and the ECB's large-scale bond-buying programs continue.

"I don't think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention," Weber warned, adding that it often meant investors were making bad choices with where to put their money.”