Global Liquidity Watch: Weekly Update
Shadow Monetary Base Dips. Bond Volatility Rises
Global liquidity has hit a record US$196.3tr, but underlying liquidity is at a 16-month low. A stronger US dollar, weaker collateral values, and slower Chinese liquidity growth are weighing on conditions. Risk appetite remains high, but rising bond volatility poses a risk
Global Liquidity Update
Global liquidity has hit a new all-time high of US$196.3tr, according to our latest flash estimates. At the same time, underlying liquidity measured by the Shadow Monetary Base has dipped to a 16-month low of US$107.7tr. The data confirm the ongoing divergence between headline liquidity and underlying liquidity growth. The key has been favourable funding conditions and a rising collateral multiplier. We note that bond volatility has picked up sharply in recent days. This needs to be monitored closely.
Summary of Changes
Liquidity is supported by:
- Still relatively low bond volatility
But dented by:
- Firmer US dollar
- Weaker collateral values
- Slowing PBoC liquidity growth
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 risen to 4.5% and annual growth has ticked higher to 6.3%
- Despite improved near-term momentum, growth rates are still below 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 has dipped to US$107.7tr. This marks a 16-month low
- Growth rates reveal a sharp loss of near-term momentum (-7.9% 3m ann.) and weakening medium-term momentum (-1.4% YoY)
- The firmer dollar, weaker collateral (bond) values and slowing PBoC liquidity injections 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, spiked higher to 105 in the latter part of last week before slipping back to 96
- It has ranged between 70-80 since April. This containment was unusual given widespread geopolitical and economic uncertainty and is attributed to deliberate volatility suppression by the US Treasury
- Our history of the collateral multiplier going back to 2010 records the CM at a new all-time high. Whether it remains there depends on continued volatility containment. Watch this space!
Currency Moves
A strong US dollar is negative for global liquidity conditions, and vice versa. The dollar continues to strengthen against all major currencies
Key cross-rates:
- US$1.322/£ (US$1.336/£ 18th September)
- US$1.137/€ (US$1.146/€)
- ¥158.9/US$ (¥157.4/US$)
- RMB6.713/US$ (RMB6.697/US$)
*\ Monthly data (full) are based on data for all 90 countries that we cover. They comprise Central Bank and private sector liquidity. These values can be restated due to seasonal adjustments and revisions to underlying data.**
*\\ Weekly data (flash) are an intra-month estimate of the monthly data. They are based on Central Bank data for the major five CBs: US Federal Reserve, People's Bank of China, ECB, Bank of Japan and Bank of England; G7 plus China high-grade collateral values; and a collateral multiplier and bond market volatility.*
Source: GL Indexes, US Federal Reserve, People’s Bank of China, ECB, Bank of Japan, Bank of England
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 has limited asset price gains in Q3. The MSCI World index is up just 2.7% so far this quarter
- Q3 / Q4? :
- Global liquidity levels have hit new highs in Q3 but both near- and medium-term growth measures point to slowing momentum, despite some improvement in the latest data
- 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 have since recovered and are currently hovering around US$85,000. That said, they are still way below the near-US$125,000 recorded last October
- Q3 / Q4? : Fed liquidity has weakened through this quarter
- 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 stabilised in Q2. Gold prices rose to US$4,700 in August but have recently settled around US$4,300
- Q3 / Q4? : PBoC liquidity injections increased through July and August but have slowed in the last 2-3 weeks
See our latest post Understanding The Commodity Boom published 25th September
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”)
- Investor exposure to global risk assets is still very high (+41)
- The rotation away from Emerging Markets (+38) and towards Developed (+34), which started in April, continues
- Within EM, investors have recently rebuilt exposure to commodity-producing regions such as Middle East/Africa (+36) and Latin America (+18). This is consistent with the current Speculation phase of the Liquidity Cycle
- Still, exposure to Asian EM remains very high (+56), particularly Korea (+58)
- At the country level, investors have been reducing exposure to China (+32) and Japan (+52) and rebuilding positions in the Eurozone (+27) and US (+23)
- Within the Eurozone, they continue to favour Germany (+26) and Italy (+24) but they remain risk-off in France (-21)
- They are reducing exposure to the UK (+5)
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