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Market Correlations at 'Nosebleed Levels': Analyst

The current political turmoil may put technical levels for stocks at risk, Philippe Gijsels, the head of research at BNP Paribas Fortis Global Markets in Brussels, told CNBC.com in an interview Thursday.

Close-up of a pen on stock price chart
Close-up of a pen on stock price chart

“Technically, the damage done to the charts has already been quite substantial. The uptrend is in most equity markets still intact. However, if we get more of the same, for a couple more weeks, technical trends risk turning down,” Gijsels said.

For a couple of indices like the Bovespa in Brazil and the Sensex in India, the trend has already turned, he said. "It is not a coincidence that I highlight these two. They depict in a very scary way, my maybe biggest worry about markets,” he added.

Seeing a huge correlation between the asset classes, Gijsels is worried what could happen on the downside.

“They all went up together in a massive 'risk-on' move created by Ben Bernanke's quantitative easing. Now they are all unraveling in the same highly correlated fashion," he explained.

“Just loot at the Sensex and the Bovespa. Agreed, both are growth markets and part of BRIC. However, we are also talking two different continents, and two different economies: one is commodity based, one agricultural with a large part IT. But which is which? Correlations are at nosebleed levels.”

“Money moves fast in and out risky assets, and that is maybe the largest market risk of all,” said Gijsels.

Lack of Leadership

The inability of leaders on both sides of the Atlantic to reach agreement on the debt crisis is now having a serious impact on the real economy, Gijsels warned.

“Markets hate nothing more than uncertainty. Markets for more risky assets like equities have been nervous, volatile and mostly down all summer,” he said.

Confident that an 11th hour deal on the debt ceiling will be signed, Gijsels warned there is a risk that the climate in Washington could still mean trouble.

“There is always a risk that they do not come to a compromise. Political conditions all over the world have become more instable and positions have polarized. The Republicans probably feel the influence of the new kid in town, the Tea Party, and this makes it more difficult to compromise,” he added.

“2012 is an election year so Obama would like to increase the debt ceiling enough to put the discussion in the closet until after the elections. The Republicans want a small increase so that the current exercise must once again be repeated before the elections,” said Gijsels.

Gijsels sees signs that the weak data is being driven by the politicians.

“Therefore it is no surprise that confidence indicators like the German ZEW or US Consumer Confidence have been weakening. However, it is not just sentiment. Recently also more 'hard' economic data like US durable good orders also disappointed,” he said.

“Earnings for the most recent quarter are mostly fine. However, visibility for the upcoming quarters is low. And who can blame CEO's and CFO's that they are currently unable to see through the thick mist,” Gijsels added.