ECB’s de Guindos sees possibility of correction in financial markets

Financial markets will likely respond with a sharp sell-off if the global economy is hit with further shocks, says Luis de Guindos – Vice-President of the European Central Bank.

de Guindos sees overvaluation as a concern

The equities market had a healthy start to the new year as China reopened, energy prices cooled off, and most importantly, the eurozone economy remained resilient.

But that’s pushed valuations a bit too far, as per de Guindos, thereby increasing the risk of a correction. Speaking with CNBC this morning, he said:

Valuations are high, risk premia is quite compressed. So, in case we have bad news with respect to macroeconomic outlook, that could give rise to a correction in financial markets.

The ECB, on Wednesday, published its biannual Financial Stability Review that suggested the stability outlook of the eurozone remained fragile.

Credit risk remains a threat to stocks

Vice-President de Guindos also talked about the ramifications of the recent turmoil in the banking sector that collapsed a number of U.S. regionals.

Across the Atlantic, UBS also had to step in and takeover Credit Suisse as Invezz reported here. According to de Guindos:

It’s possible that these events could lead to a reassessment of profitability and liquidity outlooks for euro area banks. As such, risk sentiment remains fragile and highly sensitive to [macro] surprises.

The ECB report also warned that the credit risk could eventually hit the non-bank players within the financial space as well that have, so far, remained resilient. STOXX Europe 600 is up nearly 6.0% for the year at writing.