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- Markets’ aggressive pricing of a soft landing is matched only by central banks’ determination to provide it
- Yet their dovishness masks a switch from rate tightening and balance sheet easing to rate easing and balance sheet tightening
- The resultant uncertainty is largely reflected in rates – but leaves opportunities in other markets
- Now with added high-frequency charts
- Up-to-date snapshot of the most important flows & liquidity metrics
- CB liquidity vs multiple markets
- Private vs central bank credit
- Mutual fund+ETF flows
- CB balance sheet details
- The 25 vs 50 rate cut debate has unsurprisingly been focused on the economy
- But the greater importance lies in the signal the Fed would be sending to markets
- Leading with a larger move risks reigniting financial exuberance
- Over the past week central banks drained $300bn in liquidity: as much as in April and more than in August
- While this was partially reflected in the post-Labor Day selloff, the risk is of more to come
- Resilient fund inflows are a partial panacea, but risk simply lagging
- The best explanation for markets’ summer slump and rapid rebound lies neither with rates nor with the economy
- It sits – yet again – squarely with swings in central bank liquidity
- While the resilience of fund flows and cutting of leveraged positions is somewhat reassuring, on balance we still see the support as temporary
- Attempting to explain the market bounce in terms of economic data fails to do justice to the prior sell-off
- Flows & liquidity indicators once again shed light on the moves
- On balance they leave us skeptical
- The increase in VaR is sparking a broad-based, and potentially indiscriminate, unwinding of leveraged positions
- The first question is which other leveraged positions are at risk
- The second question is whether fund flows will hold up
- Central bank rescue easing or liquidity packages are likely only with a much bigger sell-off or more obvious signs of systemic leveraged distress
- The violent rotation in equities is sparking hopes of a fundamentally-driven rally
- It has been aided by record fund inflows and a spike in CB liquidity
- But the details of both the flows and the liquidity leave us skeptical
- Expect the rotation to continue, but not the rally
