Global Liquidity Watch: Weekly Update

Global Liquidity Update

Our latest flash estimates show that Global liquidity edged lower last week to US$196.49tr. This is the first weekly fall in nearly three months. The Shadow Monetary Base fell to US$107.63tr. The collateral multiplier rose to a new record high of 1.83, reflecting the bigger fall in the SMB. This suggests that haircuts to collateral have yet to react to the sharply higher volatility of the last week or so. Growth rates confirm the ongoing divergence between headline and underlying liquidity growth but it’s worth noting that the pick-up in near-term headline liquidity growth to 5.2% (3m ann.) is due to a base effect.

Summary of Changes

Liquidity was supported last week by:

• The record-high collateral multiplier
• A slight increase in Fed liquidity

But is under pressure from:

• US dollar strength vs. European currencies and the Yen
• Weakening collateral values

It has been held in check for some time by:

• Ongoing ECB, Bank of Japan and Bank of England QT

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

• The pick-up in 3m annualised growth rates over the last 5-6 weeks is largely due to a base effect. Latest data record 5.2%
• At the same time, the flattening trend in annual growth rates since late-July point to a loss of momentum in headline liquidity expansion

Shadow Monetary Base (SMB)

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

• Nominal SMB has dipped to a new 16-month low of US$107.63tr
• Growth rates confirm an ongoing loss of momentum in underlying liquidity creation
• 3m annualized growth has fallen to -8.2% and annual growth to -2.7%
• Weakening collateral (bond) values and the firmer dollar are now compounding the negative effects of already weak Central Bank liquidity growth

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, remains well above the 70-80 range recorded from April through September
• The earlier containment was unusual given the geopolitical and economic backdrop and is attributed to deliberate volatility suppression by the US Treasury
• Admittedly, the index has fallen back to circa 98 from the 114 recorded early last week) but it is still high by recent standards
• The collateral multiplier remains at record highs indicating that collateral haircuts have yet to adjust

See our latest post Will 2027 Prove a Recession Year? 9th October 2026

A strong US dollar is negative for global liquidity conditions, and vice versa. The dollar continues to gain against European currencies and is again strengthening versus the Yen

Key cross-rates:

• US$1.32/£ (US$1.36/£ recent low)
• US$1.12/€ (US$1.17/€ recent low)
• ¥158.1/US$ (¥153.2/US$ recent low)
• 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. Bitcoin prices seem pinned below US$85,000

• 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 but the stronger US dollar is weighing on the gold price

See our post Is the Fed Deliberately Behind the Curve? 12th October 2026

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 investors are gradually reducing exposure to risk assets (latest +37 vs. late-August peak of +45)
• They have been rotating away from Emerging Markets (+36) and towards Developed (+30) since April. Both slipped in the latest data
• Within EM, investors are adding to their holdings of commodity-producing regions such Latin America (+41) and reducing Asian EM (+49). This is consistent with the current Speculation phase of the Liquidity Cycle
• At the major country level, investors have cut exposure to China (+27) and are gradually reducing Japan (+51), in favour of the Eurozone (+22) and the US (+22)
• Within the Eurozone, investors remain risk off in France (-23) and risk on in Germany (+19) and Italy (+22)
• UK exposure (-2) has fallen sharply since August

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