El-Erian: Expect a Rocky Ride in Financial Markets

“By Mohamed A. El-Erian

U.S. financial markets have been in a familiar pattern, with stock indexes fluctuating to new highs while yields on 10-year Treasury bonds remain largely range-bound. Yet close observers should note some nuances that are likely to become more important in the weeks and months ahead.

As in previous weeks, two sets of corporate announcements supported stocks last week: earnings that tended to exceed (lowered) consensus expectations and new merger-and-acquisition deals. Central banks also helped meaningfully as both Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi reiterated their commitments to bolster economic growth while limiting the risk of damaging deflation. Draghi went even further, signaling that the ECB could boost its stimulus efforts next month.

Yet all was not smooth, contributing to quite a bit of intraweek volatility. Chinese and European data suggested that the global recovery is not as robust as many had hoped. Optimism about the impact of a perceived softening in Russian President Vladimir Putin’s position on Ukraine was dashed by disturbing on-the-ground realities. And investors showed little tolerance for any bad news from stocks with markedly high valuations.

Don’t expect this market tug of war to subside easily in coming weeks. Over the next few days, new data on U.S. retail sales, housing, inflation and industrial production will provide a fuller picture of the strength of the economic rebound from a weather-depressed first quarter, but they will not tip the balance decisively one way or another. That said, savvy investors will be keeping a close eye on two evolving trends that could well become more significant drivers of market behavior going forward.

First, the Fed is in the midst of a transition…”

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