El-Erian Says Markets are Decoupling From Expected Correlations

This has been an unusual year for the global economy, characterised by a series of unanticipated economic, geopolitical, and market shifts – and the final quarter is likely to be no different. How these shifts ultimately play out will have a major impact on the effectiveness of government policies – and much more. So why have financial markets been behaving as if they were in a world of their own?

Apparently unfazed by disappointing growth in both advanced and emerging economies, or by surging geopolitical tensions in eastern Europe and the Middle East, equity markets have set record after record this year.

This impressive rally has ignored a host of historical relationships, including the long-established correlation between the performance of stocks and government bonds. In fact, correlations among a number of different financial-asset classes have behaved in an atypical and, at times, unstable manner.

Meanwhile, on the policy front, advanced-country monetary policy cohesion is giving way to a multitrack system, with the European Central Bank stepping harder on the stimulus accelerator, while the US Federal Reserve eases off. These factors are sending the global economy into the final quarter of the year encumbered by profound uncertainty in several areas.

 
Looming particularly large over the next few months are escalating geopolitical conflicts that are nearing a tipping point, beyond which lies the spectre of serious systemic disruptions in the global economy. This is particularly true in Ukraine, where, despite the current ceasefire, Russia and the west have yet to find a way to ease tensions definitively. Without a breakthrough, the inevitable new round of sanctions and counter-sanctions is likely to push Russia and Europe into recession, dampening global economic activity.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza