El-Erian Says Receding Liquidity Is Biggest Risk to Markets

El-Erian, the chair of Gramercy Fund Management and chief economic adviser at Allianz SE, says that the central bank likely will stick to its plan, slowing the economy, raising the possibility of a recession and presenting “difficulties companies may face in getting new capital.”

Financial assets worldwide have been pummeled this year as central banks tighten policy to deal with rising prices on goods and services.

El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist, sees a “sequential move” in markets from inflation/interest-rate risk earlier this year, to credit risk more recently to possible liquidity risk going forward.

“On my radar screens are three sets of potential — I want to stress, potential — liquidity strain,” he said. “One is in peripheral markets that somehow contaminate the main markets. So far crypto hasn’t, so far EM hasn’t. The second part of risk is simply the inability to raise funding at any cost. We’ve seen high yield go through this but high yield is less important than if it migrates up the quality ladder.”

The closely followed bond-market strategist pointed to one other risk, “which I’m surprised people aren’t talking about.”

“We would have expected major rebalancing flows by now to help equities” after a bad second quarter, El Erian said, and wondered whether markets “are being upset by outflows? Or is it that investors are less willing to rebalance in favor of risk assets?”

(Photo: Wei Leng Tay/Bloomberg)