Chief investment officer Alexander Friedman said much of the recent good news had been driven by central banks, which have provided $2.2 trillion of liquidity to head off short-term risks to the financial system, pushing risk assets like equities to year highs.

"Cheap money is like an addictive drug to the markets, so it is important to consider whether it will continue and, if not, what the implications will be," Friedman said a monthly letter to clients.

"While the immediate tail risks have diminished, the underlying issues of unsustainable government debt, sub-par growth and global imbalances have obviously not gone away."

Other threats to global growth, such as a sharp slowdown in China or a U.S. recession, also appear to have declined, although a spike in oil prices due to geopolitical pressures could still boost inflation and hit growth, Friedman said.

Even so, he said, the continuing injection of central bank liquidity had greatly reduced the risk of a European bank failure, spurring UBS to up its equity allocation to neutral in February from underweight previously.

The bank favors U.S. and emerging market equities, where earnings appear more robust than for European companies, still at risk while bank lending in the euro zone remains tight and spending is weak.

"We remain underweight euro zone equities because the region is still the epicenter of the largest tail risk, and is likely experiencing a mild recession," said Friedman.

"Nonetheless, we have reduced the size of this underweight position given the lower likelihood of the debt crisis escalating."

In currencies, Friedman preferred the U.S. dollar to the euro, while he was trimming an overweight position in the Norwegian krone, which as a commodities currency attracted strong support during the euro zone crisis, to neutral.

"Overall, for now it is hard to see a falling piano about to land on our head, but it is prudent to keep looking up because there are a lot of airplanes flying around," Friedman said.

(Reporting by Martin de Sa'Pinto; Editing by Mark Potter)

• A Permanent Economic Emergency