Global Liquidity Watch: Weekly Update

Global Liquidity Update

Latest flash estimates record headline global liquidity of US$196.6tr, up from the previous US$196.3tr. Underlying liquidity measured by the Shadow Monetary Base is stable at US$107.9tr. Growth rates confirm the ongoing divergence between the two. Favourable funding conditions, evident in a record high collateral multiplier, continue to support global liquidity levels. Bond volatility has jumped in the last week but the data indicate that this has yet to feed through into collateral haircuts. A sustained rise in volatility likely will. Watch this space!

Summary of Changes

Liquidity continues to be supported by:

• A record-high collateral multiplier
• PBoC liquidity injections

But dented by:

• Firmer US dollar vs. European currencies
• Weaker Fed liquidity
• Weaker collateral values

It has been held in check for some time by:

• Generally weak Central Bank liquidity growth

The next chart plots annual and 3m annualized growth rates based on “flash” estimates.

• 3m annualised growth has picked up to 5.0%
• Annual growth is stable at 6.2%
• Still, growth rates remain some way off the +15% 3m ann. and +8% YoY rates recorded mid-Summer

Shadow Monetary Base (SMB)

The SMB, comprising Central Bank liquidity and collateral (bonds), is the bedrock of global liquidity

• Nominal SMB is hovering at a 16-month low of US$107.9tr
• Growth rates point to a sharp loss of momentum in the last three weeks
• Latest data record 3m annualized growth of -8.3% and annual growth of -2.8%
• Weakening collateral (bond) values and the firmer dollar are behind the latest dip

Collateral Multiplier

The collateral multiplier—highly sensitive to bond market volatility—is another key liquidity lever. Falling volatility reduces haircuts on collateral, thereby boosting the multiplier, while rising volatility depresses the multiplier.

Volatility ↓ → Haircuts ↓ → Multiplier ↑ → Liquidity ↑

• The MOVE index, a measure of bond market volatility, has broken out of the 70-80 range recorded from April through September, jumping to levels last seen in March. Latest = 107
• The recent containment was unusual given current geopolitical and economic uncertainty and is attributed to deliberate volatility suppression by the US Treasury
• The jump in volatility has yet to feed through to collateral haircuts. Our data going back over 15 years records the CM at an all-time high

Currency Moves

A strong US dollar is negative for global liquidity conditions, and vice versa. The dollar has strengthened against European currencies but has weakened versus Asia’s

Key cross-rates:

• US$1.32/£ (US$1.36/£ recent low)
• US$1.13/€ (US$1.17/€ recent low)
• ¥157.8/US$ (¥163.9/US$ recent peak)
• RMB6.71/US$ (RMB6.80/US$ recent peak)

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Liquidity, Risk Assets, Gold and Bitcoin

There is a strong correlation between Global Liquidity and the performance of risk assets, measured for example by the MSCI World Index. Historical data shows that changes in liquidity frequently lead changes in risk asset prices, with a roughly three-month lag. Specifically, increases in global liquidity tend to be followed by positive performance in risk assets, while decreases in liquidity tend to precede periods of weaker risk asset performance.

• Q1 / Q2 : A US$2.5 trillion liquidity expansion in Q1 fuelled a powerful 13% rebound in risk asset prices (measured by the MSCI World) in Q2
• Q2 / Q3 :
• Global liquidity continued to expand in Q2 but it peaked in May as the positive tailwinds of low market volatility and firm collateral values, together with PBoC liquidity injections met the negative headwinds of generally weak global Central Bank liquidity growth, a stronger dollar, and rising real-economy demand for liquidity
• This limited asset price gains in Q3. The MSCI World index rose by just 1.6% in the quarter
• Q3 / Q4? :
• Global liquidity levels hit new highs in Q3 but growth measures indicated that momentum was slowing. Compare the 5.0% 3m ann. in the final week of September with the average 11% equivalent rate in June/July
• We are in the late-stage “Speculation” phase of the liquidity cycle. This calls for a more selective investment approach

Gold and Bitcoin are also sensitive to fluctuations in Global Liquidity, often described as monetary inflation, with a lag of approximately three months. These assets tend to perform positively when liquidity expands and lose momentum or correct when liquidity contracts. In particular, Fed liquidity drives Bitcoin, while PBoC liquidity drives gold

• Q1 / Q2 : Federal Reserve liquidity expanded in Q1 and propelled Bitcoin prices to circa US$80,000 by mid-May
• Q2 / Q3 : Fed liquidity stalled in Q2 and Bitcoin prices responded by falling to circa US$60,000. They recovered and ended the quarter just below US$84,000. Still, they remain well below the near-US$125,000 recorded in October 2025
• Q3 / Q4? : Fed liquidity weakened through Q3

• Q1 / Q2 : Profit-taking and dollar strength combined with stalled PBoC liquidity injections in Q1 to drive prices lower in Q2. Gold prices fell back to circa US$4,000 in Q2
• Q2 / Q3 : PBoC liquidity slipped a tad in Q2. Despite a jump to US$4,700 in August, gold prices ended Q3 around US$4,100. This is roughly in line with end-June levels
• Q3 / Q4? : PBoC liquidity trended higher through Q3

See our latest post Crypto, Gold and Bonds published 5th October

Investors’ Risk Appetite

The next three charts plot our investor exposure indicators. These compare holdings of risk assets to holdings of safe assets in global portfolios. (A positive value denotes that investors are “risk on” and a negative value “risk off”)

• Global risk asset exposure is still high, but our indicators show that it peaked in late-August (+37 vs. +45)
• Investors have been reducing exposure to Emerging Markets (+34) and rebuilding exposure to Developed (+31) since April
• Within EM, investors are rotating away from Asia (+51) and towards commodity-producing regions such as Middle East/Africa (+33) and Latin America (+25). This is consistent with the current Speculation phase of the Liquidity Cycle
• Investors are paring exposure to China (+28) and adding to the Eurozone (+25) and US (+22)
• Within the Eurozone, they continue to favour Germany (+21) and Italy (+24) but they remain risk-off in France (-21)
• They continue to reduce exposure to the UK (-7)

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