Citigroup Inc has warned that equities and
other risky assets could face a downturn as
central banks begin withdrawing the $1 trillion
liquidity injected to support the global
economy. Matt King, Citi’s global markets
strategist, stated that the risk rally was fuelled
by the injection of over $1 trillion of central
bank liquidity, but high-frequency liquidity
indicators suggest this is already stalling.
Together with monetary support from other
central banks, the Federal Reserve has boosted
its balance sheet by $440 billion since the US
banking crisis. King believes that this global
wave of policy support has “held down real
yields, propped up equity multiples, and
tightened credit spreads in the face of falling
earnings expectations”. Now, with China’s
central bank reining in easy policy settings and
peers in the US and Europe rekindling
quantitative tightening, this support is set to
unwind.
King believes that “stealth” quantitative easing
from global central banks has fuelled market
exuberance and warns that as China’s central
bank reins in easy policy settings and peers in
the US and Europe rekindle quantitative
tightening, this support is set to unwind. He
predicts that almost all of the central banks
will stall or go into outright reverse, leading to
the subtraction of $600 billion - $800 billion
in global liquidity in the coming weeks, which
could undermine risk in the process. King’s
views come as US stocks have climbed 8.2%
this year and Bitcoin has almost doubled since
end-December.
Others have also become skeptical of the risk
rally this year. Nick Ferres, chief investment
officer for hedge fund Vantage Point Asset
Management, has warned that equity market
pricing is overly optimistic. Ferres highlights
that market breadth supporting the rally has
been extremely poor, and that equity investors
appear to want all the benefits of rate cuts
without enduring the pain that would warrant
them. With peak liquidity past, markets could
experience a sudden pressure loss, warns King.
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