El-Erian: Markets in 'full-scale contagion'

Markets have hit a "full-scale contagion" as fundamentals and technicals influence each other in a "vicious cycle," widely followed market watcher Mohamed El-Erian said Wednesday.

"The big concern is whether bad technicals contaminate the fundamentals even more and then we get into a vicious cycle. Markets are feeding off each other and they're not able to find any firm footing," the Allianz chief economic adviser told CNBC's "Fast Money: Halftime Report."

El-Erian's comments came as the major U.S. averages sold off, partly driven by a continued slide in oil prices. He called the selling "the next stage of a broadening dislocation."

Fundamentals — including a global slowdown and emerging markets weakness — initially drove the selling, he argued. But he said technicals have worsened the issues and caused "massive price overshoots."

However, El-Erian stressed that the selling looked different from the financial crisis in 2008. He argued that it seems more like "an adjustment" to shifts in both volatility and liquidity.

El-Erian said the recent turmoil means that the Federal Reserve will not hike rates later this month. Central banks seem either "less willing" or "less able" to use policy to "repress volatility," he contended.

"Recent financial market turmoil means that the Fed definitely will not move in January with another hike," El-Erian said. "But it does not, at least as yet, remove the likelihood of further hikes in the course of 2016."

The central bank's policy making committee next meets on Jan. 26-27.

El-Erian recommended investors stay in cash during the current environment.

Reuters contributed to this report.