Global Liquidity...What A Year!

by Michael J. Howell31. December 2013 12:41
Latest Global Liquidity Index (GLI) hit a value of 59.8 at end- November 2013 ('normal' range 0- 100). Yet Developed market liquidity hit a whopping 76.7. EM liquidity slumped to only 19.2, dragging back the global total. There are two Worlds out there and the big event in 2013 was not the fear of Fed tapering but the reality of Chinese tapering. The strength of DM liquidity coes not from generous Central Banks but from a resurgent private industrial sector. This may be confirmed by the parallel leap in real interest rates to break their decade-long downtrend. Capex looks set to pick-up in 2014 giving economies an extra spur but in the process depleting the pool of financal liquidity. Given that the GLI is losing momentum, this combination of high but decelerating liquidity conditions moves us out of Calm and puts us into the Speculation phase of the cycle. This eponymous investment regime is associated with stronger cyclical growth, rising interest rates and outperformance from cyclical value sectors, like industrials. 2014 will be a profitable year, but it will also be a more volatile one.

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Global Liquidity...What A Year!

by Michael J. Howell31. December 2013 12:20
Latest Global Liquidity Index (GLI) hit a value of 59.8 at end- November 2013 ('normal' range 0- 100). Yet Developed market liquidity hit a whopping 76.7. EM liquidity slumped to only 19.2, dragging back the global total. There are two Worlds out there and the big event in 2013 was not the fear of Fed tapering but the reality of Chinese tapering. The strength of DM liquidity coes not from generous Central Banks but from a resurgent private industrial sector. This may be confirmed by the parallel leap in real interest rates to break their decade-long downtrend. Capex looks set to pick-up in 2014 giving economies an extra spur but in the process depleting the pool of financal liquidity. Given that the GLI is losing momentum, this combination of high but decelerating liquidity conditions moves us out of Calm and puts us into the Speculation phase of the cycle. This eponymous investment regime is associated with stronger cyclical growth, rising interest rates and outperformance from cyclical value sectors, like industrials. 2014 will be a profitable year, but it will also be a more volatile one.

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Global Liquidity Update

Latest Global Liquidity & Capital Flow Data - November Update

by Michael J. Howell18. November 2013 12:03
Our latest Global Liquidity Index (GLI) hit 55.0 (range 0-100) at end-October2013. This above average score is being depressed by still very weak Emetging Market liquidity. Without this drag and excluding soft cross-border flows Developed Market liquidity hit an equivalent GLI of 76.2. The two key stories from our data are (1) DM liquidity still outpaces EM, and (2) Central Bank liquidity injections are being eclipsed by robust private sector flows. Indeed, as our latest research shows, this is the very reason why gold is sliding. We stand at a major inflection point in markets where market leadership is set to change, Volatility looks too low and cyclicals have underperformed too much over the past few years. Tapering will affect psychology more than it affects real economies.

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Latest Global Liquidity & Capital Flow Data

by Michael J. Howell18. November 2013 12:03
Our latest Global Liquidity Index (GLI) hit 55.0 (range 0-100) at end-October2013. This above average score is being depressed by still very weak Emetging Market liquidity. Without this drag and excluding soft cross-border flows Developed Market liquidity hit an equivalent GLI of 76.2. The two key stories from our data are (1) DM liquidity still outpaces EM, and (2) Central Bank liquidity injections are being eclipsed by robust private sector flows. Indeed, as our latest research shows, this is the very reason why gold is sliding. We stand at a major inflection point in markets where market leadership is set to change, Volatility looks too low and cyclicals have underperformed too much over the past few years. Tapering will affect psychology more than it affects real economies.

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OMG EM FX!

by Michael J. Howell11. November 2013 19:48
It's happening again. Key EM forex markets are weakening again in November. Indeed, we fear they should. Our data collection shows that private sector liquidity aka 'good money' flows into EM are weak, and far below equivalent data for the West. These poor fundamentals point to further EM forex losses and investors should note that every EM crisis is first-and-foremost a currency crisis. See our latest EM monthly for details.

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Global Liquidity...boom?

by Michael J. Howell29. October 2013 21:12
Recent UK Media comment has picked up the buoyant Liquidity story. No question that Liquidity is strong and little doubt that strong liquidity acts through rising asset prices. However, our database covers all cah and credit flows to the private sector across 80 economies and not just deposit flows to banks. To be accurate our data shows there is a World of difference between Developed Market Liquidity which is close to previous highs (although not yet at new highs) and Emerging Market Liquidity which is near its lows. For completeness, we can add that Frontier Market is closer in strength to Developed Markets. Emerging Markets are the odd man out. The reason in our view remains the slowing Chinese economy which has clipped EM private sector cash flow. We should be worrying about recent Chinese PBoC tapering, and not only upcoming Fed tapering.

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Latest GLI (Global Liquidity Index)

by Michael J. Howell14. October 2013 22:00
Global Liquidity is a measure of World capital flows and a barometer of upcoming risk. It remains elevated and still generally supportive of asset markets, but the high 60.0 index (0-100 'normal') reading of our GLI (Global Liquidity Index) at end-September 2013 hides two important facts. First, the developed markets (70.8) enjoy much stronger liquidity conditions than Emerging Markets (16.0). Second, private sector liquidity (78.1) remains well in excess of Central Bank liquidity (37.4). These observations are important because they are not only almost opposite to the consensus view, but they seem to be driving markets. Most investors believe that Emerging Markets enjoy structurally strong private sector or 'good' money flows while Developed economies are largely being supported by cyclical Central Bank QE or 'bad' money flows: the reality is that the opposite is true. ['Bad' here refers to the negative effect on currencies]. This 'Quality Theory of Money' lies at the heart of our regular capital flow analysis and it explains why the gold price and EM currencies are simultaneous fragile.

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New Frontiers

by Michael J. Howell26. September 2013 14:07

Frontier stock markets have outperformed strongly in 2013 compared to traditional EM. The reason is unequivocally because of better liquidity conditions. In a report published today, we examine the detail behind this. We conclude that Frontier Market liquidity is more closely correlated to buoyant US liquidity, whereas EM liquidity is more closely correlated with lacklustre Chinese liquidity. Thus, if US liquidity remains strong and Chinese liquidity fails to pick-up, Frontier markets will further outpace EM over coming months.

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September FOMC: Bernanke's Eastern Put

by Michael J. Howell19. September 2013 17:02

The Fed surprised markets by deciding not to start 'tapering' its QE programme at its September meeting. What does this mean? Markets read it bullishly, that the Fed will continue to buy bonds and pump in cash, probably because they sense policy-makers are concerned by recent weak-ish economic numbers. However, whatever the FOMC's internal doubts and debates, the Fed has been striving all year to divide 'forward guidance' on interest rates from 'tapering' of QE, arguing both publically and privately that the former is more important overall and anyway set more in line with economic prospects. Meanwhile, QE is thought to be more important for the finance sector, and some Fed policy-makers have been concerned over recent months by bubbles and a 'reach for yield'. This argues for tapering now. Therefore, the Fed's latest decision is puzzling because if they are concerned about economic growth they could have hinted at lower future 'forward guidance', while still making a token gesture towards some tapering. Something else may be up? This could be EM. July/ August saw a rout in several EM currencies and EM equity and bond markets because of the upcoming threat of tapering. The fragile state of EM may have convinced US policy-makers to hold fire on tapering for another couple of months. So, overall no real change in view. On balance a bit more bullish if the Fed is truly an implicit protector of EM, and on this read the Fed may not be as concerned about the US economy as some fear. Therefore, keep selling those bonds; buy back some dollars and bottom fish in EM. The Bernanke Put may have just shifted Eastwards!

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Latest GLI, Liquidity Data

by Michael J. Howell19. September 2013 16:54

This month we move to new 2010-weights for our GLI (Global Liquidity Indexes). EM get a larger share and Frontier Markets squeeze in with a 1.4% weighting.  Latest end-August 2013 data show our monthly GLI hit a reading of 59.2 ('normal' range 0-100). [Using the old weights, the GLI would be 70.8.] The overall index is one standard deviation above its rolling four-year average. The leaders in this cycle are unquestionably the US, Japan, Australia, Frontier Markets and the UK , while the Eurozone and EM are lagging. This looks to be a remarkably 'normal' cycle.

 

 

 

 

 

 

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