“Volatility is rising, liquidity is falling in some places and anxiety is increasing, according to Mohamed El-Erian, CEO and co-chief investment officer of fund giant Pimco.
El-Erian believes that these changes are not just a “blip,” but rather are “indicative of a deeper change.”
“The related underlying shifts could be secularly beneficial or could well signal more volatile times ahead,” he notes.
And the “dislocations seem to be cascading gradually from the least liquid [markets] to the more liquid ones,” instead of impacting all the market segments at the same time.
For instance, he explains, Japan’s central bank’s purchases of large amounts of securities has helped sparked a rally in Japan’s stock market.
“In the last few days, however, Japan is no longer emitting a consistently constructive signal,” El-Erian writes in an article for Fortune. “The Nikkei has fallen 12 percent since May 22, with some notable daily drops of 7 percent, 5 percent and 3 percent. The behavior of Japanese government bonds has been quite volatile and increasingly inconsistent. And the yen is now less unidirectional.”
Japan’s government has good cause to be worried, he says. If it cannot get the country on the road to economic growth, the risk of financial turbulence will substantially increase.
“It has no choice but to venture even deeper into experimental territory as it attempts to influence market pricing and investor behavior,” El-Erian states….”
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