UBS Group AG’s chief is sounding the alarm on fresh monetary easing just as European policy makers appear poised to deliver another helping to stimulus-hungry markets.
“I’d be very, very careful about growing further the balance sheet of central banks,’’ Sergio Ermotti said in a Bloomberg TV interview on Tuesday, ahead of the European Central Bank’s policy decision this week. “We are at a risk of creating an asset bubble."
Europe needs to focus on political and economic reforms in order to spur growth, while the ECB “can only help in a transition, it’s not a solution to the problems," Ermotti said.
Subdued inflation expectations mean money markets are pricing in a 40% chance of a 10-basis-point rate cut at Thursday’s meeting. Investors also reckon the monetary authority is poised to restart its asset-purchase program this year -- intensifying the hunt for yield across risky assets.
Global central banks have been forced to turn tail after paring a decade of stimulus into their economies via quantitative easing. Net bond purchases by the Federal Reserve, ECB and Bank of Japan will swing back above zero from September, according to an analysis of their balance sheets by Bloomberg Economics.
For investors, the about-face has fueled an “everything rally” lifting both risk-on and risk-off assets. The Stoxx Europe 600 Index advanced 13% in the first half of the year, the best returns in the six-month period since 1998. Bonds have also soared on the intense thirst for yield spurred by dovish monetary bets and a growing pile of negative-yielding debt.
“Asset prices went up but it’s not really correlated with investor sentiment, which is in my point of view, of course, a very dangerous development,” said Ermotti.
For money managers with $489 billion between them, fears of monetary-policy impotence are now second only to tariff negotiations on their list of biggest tail risks, according to Bank of America’s July survey.
Many traders have remained on the sidelines of this year’s rebound in risk assets as they fear the U.S.-China trade spat could curb profits and stall global growth. Ermotti said client cash balances remain “very high.”
“What they say is that they’re willing to step into the market if there’s a major correction,” he said.