Submitted by Taps Coogan on the 29th of October 2019 to The Sounding Line.
Allianz chief economic advisor Mohamed El-Erian recently spoke with CNBC about the ongoing sell-off in markets, warning of continued divergence and remarking on the absence of central bank reassurances.
“No I don’t think the party is over. I think what we are seeing is a transition in regimes. One from where markets are comforted by ample, predictable liquidity to now having to recognize that divergent fundamentals…, are going to be the driver of asset prices. That’s the transition that has been long in coming… For me it’s not surprising that you’ve seen this spike in volatility. I always think, ‘what took so long,’ because central banks have been signalling that transition for quite a while… I think it took a couple of things to be priced in. One was the Fed being very insistent on its four hikes, and next year, and not saying a single soothing word during the volatility, which is different from its past. And secondly, if the markets wanted any reminders they got it… from the ECB, because the ECB said despite losing momentum, despite Italy, despite emerging market, despite trade, we are still intending to stop our QE at the end of the year.“
“I think that this divergence theme is a really important one. Advanced economies were correlated for a very long time. Correlated in low growth and then correlate in what many mistakenly saw as a synchronized pickup. Divergence is a different issue. We’re seeing interest rate differentials between Germany and the US stretched to high levels. We’re going to see more pressure on the FX markets. So there is the whole issue of dealing with divergence. Of course, the best way of dealing with it is for Europe to get its act together on policies and pick-up. The second issue that I think is important is that we’ve underestimated liquidity risk and I think that’s one of the messages that’s coming out from the last few weeks is liquidity risk is back and investors need to pay much more attention to that.”
Enjoy the interview above.
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