This is an excerpt from the weekly Pro Trader Macro Liquidity Report. Macroliquidity Pro Trader weekly subscribers (or Professional Edition), click here to download complete report in pdf format.
Macroliquidity increased last week. The trend is still positive, although at a much shallower angle than during the years through 2014 when the Fed was doing QE. The growth rate this year has only been around 2% and stocks are no longer responding positively. 2% liquidity growth is effectively tight money when governments around the world, particularly the US, continue to sell massive amounts of debt every month to pay current government expenses. That sucks cash out of financial accounts faster than central banks are creating it, with the Fed now on the sidelines.
The Treasury pounded the market with $310 billion in net new supply in November. Yet the markets held up miraculously for most of that month. I had vacillated between expecting a delayed reaction selloff as dealers and investors rebuild cash, and thinking that ECB and BoJ money printing may forestall that. The markets have vacillated as well, to which those competing forces undoubtedly contributed. But stock prices are lower now than they were at the beginning of November. Prices held up for a while as dealers and investors expended cash to keep buying both Treasuries and equities. But eventually, as expected, they moved to rebuild cash, taking turns between liquidating stocks, then fixed income, particularly anything that was leveraged and not nailed down.
The macroliquidity indicators this week do not show any sign that a significant change is at hand. Yet, we know that plunging commodities, emerging markets, and leveraged junk bond markets are destroying cash. That should begin to show up in these indicators, particularly in bank deposits, in the weeks ahead.
The ECB and BoJ will continue to do everything in their power to counteract that, but to no avail. Once sentiment turns negative, there’s not much central banks can do. They are pushing on a string.
Meanwhile, signs of a possible crunch are showing up in soaring money market rates in durations longer than overnight. I do not believe that the Fed can make a rate increase stick, and the lack of movement in overnight financial company commercial paper as well as Fed Funds, supports that, but there are clear signs of turmoil even in maturities as short as 7 days, and more so at 30 days. It’s possible that the fear of even a minuscule rate hike is becoming a self fulfilling prophecy as selling of leveraged instruments like commodities futures, leveraged emerging markets debt and equity bought on margin, and all other leveraged debt, contributes to money market upheaval.
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