El-Erian Says Prepare for Volatility on Central Bank Divergence

  • Exchange-rate swings will spill over into other markets
  • Says bouts of volatility will create buying opportunities

Mohamed El-Erian said investors should prepare for more volatility next year as foreign-exchange and fixed-income markets will be affected by divergent monetary policies globally.

The volatility will come from the foreign exchange market and spill over into other markets, El-Erian, who is chief economic adviser at Allianz SE and Bloomberg View columnist, said Monday at a conference in Scottsdale, Arizona, organized by the Information Management Network. It will be amplified at times by reduced liquidity, after banks retreated from some markets, he said.

“Volatility will lead to patches of illiquidity that accentuates volatility," he said.

The U.S. Federal Reserve is preparing to raise interest rates for the first time since 2006, while central banks elsewhere are still pushing borrowing costs lower. Investors last week caught a glimpse of what may be in store, when the dollar on Dec. 3 suffered its biggest daily loss since March after the European Central Bank unveiled extra monetary stimulus that fell short of market expectations.

El-Erian said that bouts of volatility will create buying opportunities, as will markets that have become unhinged from fundamentals, such as oil, high yield, and emerging-market equities.

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