Warning: Market volatility ahead

When skiing, it is always advisable to keep your skis approximately parallel.

If they start travelling in different directions, at first it might be manageable. Then it gets painful. And then catastrophic.

Investors fear we are at stage two. The collapse in the share prices of the mining companies over the last year could be a warning of market pain ahead.

Particularly as it comes just ahead of what is widely predicted to be the first rise in interest rates by the Federal Reserve since 2006.

One - mining woes - is signalling a global economy under stress.

The other - rising interest rates - is signalling a recovering American economy.

Divergent streams often lead to market volatility.

'Material correction'

Michael Spencer, the chief executive of the City broking firm ICAP and former treasurer of the Conservative Party, certainly believes that pain for the miners could soon be reflected elsewhere in the markets.

He predicts there could be a "material correction" - downwards - in the value of the markets.

That means a fall of at least 10%, wiping billions of pounds of value off share prices.

And affecting returns for investors, which of course include our pension funds.

"I think equity markets are vulnerable to a material correction," he told me on his way to ICAP's annual charity day where all the company's revenues and commissions for the day will be donated to good causes.

"I think equity markets are very fully priced at the moment.

"Price earnings multiples [a comparison of a company's share price and its profits] are high by historic standards.

"The markets are being supported by quantitative easing, which has provided, I think, a very false comfort factor to investors.

"I think we could see a bit of a shake-up in equity markets, particularly as we're going to see soon the first rise in US interest rates for eight years.

"And I think that will portend a series of rises next year. Not big ones, but nevertheless, the direction of rates will finally have changed.

"I think it will be a pretty interesting and rocky start to the New Year in the financial markets and we'll have some volatility."

Volatility risk

The Bank of England appears to agree. In the latest Financial Policy Committee minutes released today, the FPC says there is a risk of further market turmoil.

"Capital flows had been sensitive to diverging prospects for monetary policy around the world and there was a risk of further volatility in capital flows as that policy divergence progressed," the minutes say, referring to the fact that as the US looks to increase rates, the UK and Europe more generally do not appear keen to follow the same path.

"Though the likelihood of a tightening in policy by US policymakers was widely expected, the market reaction to any decision by the [Fed] to increase interest rates remained difficult to predict."

Many argue that, in America at least, the remarkable era of cheap money is coming to an end.

Much of that money has gone into buying up shares in companies, creating frothy prices that may not be underpinned by what are described as "the fundamentals".

Or, put another way, some companies are not as valuable as their share price suggests.

And that tends to mean one thing. Collapsing share prices.