Courtesy of Lee Adler of the Wall Street Examiner
The stock and bond rallies went flat in August and bonds sold off in September as heavy Treasury supply and foreign sovereign liquidation of Treasury holdings created friction in the markets. Liquidity growth has been slowing, and while overall liquidity is still rising, the market response to rising liquidity has been diminishing as friction builds.
Liquidity growth in Europe has stalled as deposits there shrunk again. In spite of massive ECB money printing, European bank deposits have fallen for two straight months. That indicates not just capital flight, but cash extinguishment via loan repayments and writedowns. The culprit is NIRP, which discourages account holders from keeping large balances or buying negative yielding sovereign paper. It also puts downward pressure on US rates. That is only offset this month by the fact that the Treasury is unleashing massive new T-bill supply on the market in October. This will absorb excess cash, and bring this pressure to bear on US stocks and bonds for the remainder of the month. That could reverse in November.
Meanwhile, US banks have been buyers, but not enough to offset big increases in Treasury supply and foreign central bank liquidation of their Treasury holdings at the Fed. This negative trend isn’t likely to reverse any time soon. It has been sufficient to stop the stock market rally and cause a correction in bond prices. Unless financial pressures ease around the world, and there’s no sign of that, this will likely continue to be a negative factor for the longer run. This trend began a couple of years ago, and could get worse.
In a world of instant interconnection, liquidity anywhere is liquidity everywhere, flowing especially to the US. As goes the money printing in the US, Europe and Japan, so go the US markets…
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