ECB's de Guindos warns financial markets are vulnerable to a sharp sell-off

Financial markets could look a crisp downturn successful the lawsuit of immoderate further shocks to the planetary economy, European Central Bank Vice-President Luis de Guindos told CNBC connected Wednesday.

Earlier connected Wednesday, the ECB published its May Financial Stability Review, saying that the euro area's stableness outlook remained fragile successful the aftermath of caller turmoil successful the banking sector, which saw the nonaccomplishment of respective U.S. determination banks and the emergency takeover of Credit Suisse by UBS.

Although it determined that slope resilience successful a higher involvement complaint situation was not a interest successful the euro area, with fundamentals remaining coagulated and regulatory involution proving effective, the ECB said it is "possible that these events could pb to a reassessment of the profitability and liquidity outlooks for euro country banks."

Global banal markets made a robust commencement to 2023, fixed falling vigor prices, China's reopening and the astonishing resilience of the euro portion system — driving equity valuations backmost supra humanities averages, the ECB highlighted.

This reversed abruptly successful precocious February and March arsenic a hawkish code from cardinal banks and unexpected accent successful the banking assemblage roiled investors astir the world. De Guindos said existent marketplace positioning rendered stocks susceptible to immoderate further macro surprises.

"There is the anticipation of a correction successful markets, and the crushed is that valuations are high, are elevated, and if you look at, for instance, hazard premia, they are rather compressed, truthful conscionable successful lawsuit that we person atrocious quality with respect to the macroeconomic outlook, that could springiness emergence to a correction of markets," de Guindos said.

The ECB study noted that the imaginable for "disorderly adjustments" successful fiscal markets had spiked against a backdrop of tighter fiscal conditions and little marketplace liquidity. The banking assemblage turmoil of March led to a widening of recognition hazard premia successful the euro area, the cardinal slope said.

"By contrast, the information that equity hazard premia stay compressed successful implicit and comparative terms, particularly successful the United States, raises concerns implicit imaginable overvaluation. Equities whitethorn frankincense beryllium much susceptible to a disorderly terms correction successful the lawsuit of a further deterioration successful the economical outlook," the study said.

"As such, hazard sentiment remains fragile and is highly delicate to surprises arsenic regards the outlook for inflation, maturation and monetary argumentation successful mature economies."

This could instrumentality the signifier of much persistent inflationary pressures, forcing cardinal banks into "more significant" argumentation tightening than the markets person presently priced in.

There are besides risks to the banking strategy from immoderate fragility successful non-bank fiscal institutions, de Guindos highlighted.

"We bespeak that interlinkages are applicable and are important, truthful that you cannot immunize what happens successful the banking manufacture from the non-banking industry."

The ECB study said that, though the non-bank fiscal assemblage remains resilient for now, exposures to recognition hazard stay high, opening it to "the hazard of worldly losses should firm assemblage fundamentals deteriorate substantially."

"In addition, non-banks' vulnerability to spot markets has accrued markedly successful caller years, rendering institutions susceptible to ongoing spot terms corrections," it said.

"Strong links with banks, arsenic an important root of backing for instance, could besides springiness emergence to further vulnerabilities successful the banking assemblage via liquidity and recognition hazard spillovers."