Despite efforts by the Federal Reserve, European Central Bank, and the Bank of England to decrease global liquidity, it is increasing instead and driving investors into riskier assets. Joseph Adinolfi reports for MarketWatch:
Gains for global equities have left many on Wall Street perplexed as stocks — especially high-risk growth names with little or no profits — have rebounded from last year’s punishing selloff, resisting both the pull of more attractive bond yields, and the threat of higher interest rates.
But some Wall Street analysts say they’ve found an explanation that has little to do with inflation and the state of the global economy.
The upshot is this: The Federal Reserve, European Central Bank and Bank of England have advertised that they’re trying to drain the ocean of banking-system liquidity, but on a global scale, liquidity has actually increased in recent months. That’s due in part to factors that are outside the control of policy makers.
A trillion-dollar boost to asset prices
In a research note shared with clients last month, Matt King, a global markets strategist at Citigroup Inc., detailed how the world’s largest central banks had recently injected $1 trillion into the global financial system.
The bulk of this increase, according to King’s analysis, came from the People’s Bank of China, which has bucked the trend of global monetary tightening and instead opted to directly inject liquidity into its banking system, accounting for the largest share of the $1 trillion figure.
“Even as the central banks have told us they’re going to be tightening, it turns out that on at a global level, they’ve just added $1 trillion worth of liquidity over the past three months,” King said.
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