Mohamed El-Erian, chief economic adviser of Allianz, told CNBC Friday morning that there is a "regime change" going on in the market.
Whereas previously markets were driven by "ample, predictable liquidity," investors are now realizing that divergent fundamentals are going to be the driver of asset prices. The major drivers are the Federal Reserve not giving a "single soothing word" in addition to rate hikes, as well as the ECB saying it will stop quantitative easing.
"Advanced economies were correlated for a very long time -- correlated in low growth and then correlated in what many mistakenly saw as a synchronized pick up," El-Erian said. "Divergence is a different issue. We're seeing interest rate differentials between Germany and the U.S. stretched to high levels. We're going to see more pressure on the FX markets."
Second, investors have underestimated liquidity risk, El-Erian said.
Watch the interview below:
