Why markets increasingly becoming correlated spells trouble?

Ahead of today's announcement from ECB president Mario Draghi relating to a decision whether to make the monetary environment in Europe more expansive than where it currently stands, we heard yesterday from Sweden's Riksbank who gave promising commentary regarding the country's economic outlook yet added that it's monetary toolbox remained opened and should further intervention take place on the part of the ECB it wouldn't shy away from continuing its extended run of stimulus.

I expressed concern over the matter by saying the ECB's partial contribution towards distorting asset markets along with other advanced nations enacting the same strategy with similar force, namely the Bank of Japan and Swiss National Bank, was overstating central bank's need to influence these markets closely but also directly competed against their smaller counterparts like Sweden who had no choice but to put up a brave defence in imitating what the bigger central banks were doing but were likely to be defeated due to comparative size.

New evidence shows that assets have become so distorted that the utilisation of diversification through the process of portfolio management won't mitigate the risk often associated with having a variety of distinct assets.

Asset contagion worse than 2008 as markets held hostage to rates https://t.co/44y6zYxZYX via @luwangnyc pic.twitter.com/so5w6ILsn3

— Bloomberg Markets (@markets) September 8, 2016 

The Credit Suisse Cross-Market Contagion Indicator measures the interconnectedness of different instruments price movements in relation with one another in finding the correlation amongst the basket of instruments that includes foreign exchange, commodities, bonds and equities. An optimal outcome for this indicator would be to suggest there's little correlation between instruments however the current reading says the risk of contagion is higher than it was pre-Financial Crisis.

Contagion would occur due to the direct relationship asset prices have taken on with one another and if a market crash were to happen the effects wouldn't be isolated to one asset class.

We've seen an extensive rally into bonds returning positive yield and in some extreme occasions investors being forced to accept longer term maturities in exchange for meagre coupon payments. The zero yield parade not only pushes the prospects of bond investors into jeopardy since the convexity (the rate of change in bond prices when rates increase/decrease) is alarmingly high, the tiniest of interest rate hikes could trigger a full blown financial market crisis it seems.

The responsibility falls squarely on central banks around the globe but as much as we can play the blame game perhaps we should give thought to the idea of a state in the global economy where monetary policy has exhausted it's options, government coffers are burdened with huge debt bills to pay with lenders insisting on reducing the load, effectively creating a situation where no interventionist policy is in place to guide the world economy forward. Absolute chaos but closer than what you think.