Macroliquidity edged to a new high in the past week as the Fed held its regular monthly MBS settlements March 14-22. The markets must now fend without the Fed’s help again until mid April. But they have plenty of liquidity coming from the BoJ and especially the ECB as NIRP drives capital out of Europe and Japan into the US. US bank loan growth also contributes to deposit growth which means increasing liquidity available for the market.
The problem is that sentiment has undergone a slow shift toward greater skepticism of central banks to keep bull markets going, and therefore toward a more cautious and even negative stance on both stocks and bonds.
So far, in spite of the recent rally there’s no sign of a swing back toward the positive. The current upswing is now near the trend limit that marked the last two market peaks. This is an important test of whether the trend toward greater caution is becoming something greater than an intermediate term phenomenon. Is it part of a major cyclical shift, or even a secular shift? Another market downturn from here would lean toward at least the former if not the latter.
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