El-Erian: The markets currently believe very strongly in two things

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Even when uncertainty arises as to when and how Iran will take revenge after a U.S. airstrike defeats one of its leading military commanders, Mohamed El-Erian said markets have two basic principles in hand.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "" The market losses are less than they were and that reflects the deep conditioning that investors had, ”said El-Erian, chief economic advisor at Allianz, during Yahoo Finance & nbsp;The last round, "It cannot be said that the tensions did not escalate. There has been and is likely to be some kind of retaliation." "Data-reactid =" 16 ">" The market losses are lower than originally and reflect the deep conditioning of investors. "El-Erian, chief economic advisor to Allianz, said during the Yahoo Finance finals," It cannot be said that tensions have escalated. There was, and we'll probably get some kind of retribution. "

"But the markets believe in two things that are very strong," he added. “First, that this will not be a full war. Second, that the Fed is on the edge and will intervene if market volatility is too high. "

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Late Thursday, the & nbsp;Department of Defense confirmed& nbsp; that Qassem Soleimani, chief of the Quds Force of the Islamic Revolution Guard Corps, was killed in an airstrike ordered by President Donald Trump in Baghdad, & nbsp;according to a statement.Iran's chief leader Ayatollah Ali Khameneivowed to inflict "severe retribution""data-reactid =" 18 "> Late Thursday, the U.S. Department of Defense confirmed that Qassem Soleimani, chief of the Quds Force of the Islamic Revolution Guard Corps in Iran, was said to be during one of the president's, according to a statement by Iranian Supreme Leader Ayatollah Ali Khamenei Donald Trump ordered air raid in Baghdad killed and severe retaliation against those involved in Soleimani's death.

<h2 class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The initial market decline could have been larger"data-reactid =" 19 ">The initial market decline could have been larger

The market's response to the announcement was quick, if not long-lasting. During the Friday session, the Dow recovered from losses of up to 368.4 points and closed at 226.1 points. The S&P 500 lost just 0.7% on Friday after falling more than 1% from the session's low.

<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "And the internationally sensitive Brent crude oil prices recorded significant Profits After hitting the highest since September, the commodity fell below $ 69 a barrel on Friday afternoon.Even when some analysts warned of possible supply disruptions as Iran,An OPEC member and a large global oil producer weighed retaliation. "data-reactid =" 21 "> And the internationally sensitive crude oil prices for Brent rose sharply after having previously reached the highest level since September, and the commodity fell again down to USD 69 a barrel by Friday afternoon, although some analysts warned of possible supply interruptions had when Iran, an OPEC member and major global oil producer, was considering retaliation.

"I think we both said the initial withdrawal would be greater than before," El-Erian told Yahoo Finance. “And what has actually turned out shows that investors have always been conditioned to buy the dip. They were conditioned not to extrapolate geopolitical or political shocks. And that served them very well. You made a lot of money with this strategy. "

Mohamed El-Erian, Alliance's Chief Economic Advisor and former President of President Obama's Global Development Council. REUTERS / Lucy Nicholson

"So you need a big escalation to get people out of this state, otherwise it will win," he added.

At the same time, the Federal Reserve was a pillar of market resilience, said El-Erian. In his view, the relatively high valuations of US stocks "due to cheap market techniques driven by enormous market liquidity" continue to be justified.

"The Fed's balance sheet has expanded by more than $ 600 billion in the past four months," said El-Erian. He referred to the Fed's decision at the end of last year to make major investments again to ensure the smooth functioning of the financial markets. "That's a very large number. They don't call it QE (quantitative easing), but it does have a QE impact in terms of the impact on asset prices. On top of that, the ECB (European Central Bank) – it's very difficult, not in the short term to be constructive. However, the medium-term uncertainties are increasing. Today is another example of this. "

And in the medium term, according to El-Erian, investors should be most careful.

"My concern – and I keep saying this – is not to ignore the increasing medium-term uncertainties," said El-Erian. "So yes, keep an assertion on your head, but do so in a selective manner that also recognizes that we will face increasing uncertainty over the next few years."

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Emily McCormick is a reporter for Yahoo Finance.Follow her on Twitter: @emily_mcck"data-reactid =" 40 ">Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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