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- A chart of publication titles against price action
- It is tempting to look at the performance of US equities in 2H24 and conclude that central bank liquidity no longer matters for markets
- But a closer examination of both other markets and shorter timescales suggests this would be a mistake
- It instead highlights the predominant role currently being played by fund flows and US exceptionalism
- While it is possible to paint scenarios where liquidity contributes to a melt-up in risk in early 2025, on balance we see it as one of a number of reasons to be skeptical of the bullish consensus
- Many fundamental indicators show a sudden deterioration
- In combination with markets’ Panglossian interpretation of prospects under Trump, these represent reasons to take profit
- Too much of markets’ performance comes from a fiscally-driven surge in fund flows
- Trump’s triumph is testament not only to the inadequacies of the Democratic campaign and the electorate’s dislike of inflation, but to the popularity of populism globally
- Trump trades likely to continue at least until inauguration, and conceivably thereafter – unless a bond rout stops them first
- The right places to position are America-first trades which will benefit from – or at least withstand – higher term premia
- The election remains too close to call
- But market pricing has moved decisively towards Trump
- Take profit on Trump trades – or use options instead
- 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
