EU markets watchdog warns investors of market bubble threat

By John O'Donnell FRANKFURT (Reuters) - Rock-bottom interest rates and political uncertainty such as Brexit mean risks of an asset price bubble are at their highest, a European markets watchdog said on Tuesday, in an unusually strongly worded warning to investors. In a report, the European Securities and Markets Authority (ESMA) cautioned that "market and credit risks were very high", pointing to the threat of contagion, or a spillover of problems to other parts of finance. It said "valuation risk", a reference to the price of investments, was at the "highest levels due to financial weakness and geopolitical uncertainty". The warning carries weight because the agency has deep insight into markets across the 28-member European Union. Although it mirrors concerns long held by some bankers, it is in stark contrast to efforts last week by the president of the European Central Bank, Mario Draghi, to play down fears that markets are overheating. "Brexit-related uncertainties remain among the most important sources of risk," the authors of the ESMA report said, in a warts-and-all analysis of risks that singled out inflated asset prices or a cyber attack as potential problems. "We expect the political calendar of the EU including Brexit negotiations, policy developments in the U.S., and geopolitical developments to remain the major risk drivers for 2017," the report said. Last week, Deutsche Bank's Chief Executive John Cryan called on the ECB to change course on providing cheap money after it has printed more than 2 trillion euros (£1.80 trillion), warning of price bubbles in stocks, bonds and property. (Reporting By John O'Donnell; Editing by Susan Fenton)