Global Equity Markets: Signs of Contracting Liquidity?

It’s the same politics-driving-markets story.

From the Bloomberg,

U.S. stocks retreated, reversing an earlier advance for the Standard & Poor’s 500 Index, after Federal Reserve policy makers refrained from taking new actions to bolster growth at the world’s largest economy.

While global central banks have been engaged in unprecedented acts of asset purchasing or quantitative easing (QE), the variances of the scale of applied QE will translate to differences in the impact on financial markets.

However, the continuing EU debt crisis, China’s ‘slowdown’ and liquidations from the MF Global fallout seem to be neutralizing whatever global central banks have been doing.

The Euro has broken down. Since the Euro has the largest share in the US dollar index basket then this means an upside breakout for the US dollar

Now if the US dollar’s rise has been signaling contracting liquidity in parts of the world, then this should be reflected on the price of gold.

And contracting liquidity could be also signal slower growth which should also reflect on prices of copper.

Copper indeed has been sluggish, but appears to have deviated from gold in terms of price trend. Copper still is consolidating while gold has broken down.

Nonetheless, part of such weakness could be percolating into equity markets.

The US S&P has languished but also remains on a consolidation mode. Since the degree of relative liquidity appears to be generating variable effects, then correlations will likewise manifest signs of divergence.

Chart from Bespoke

As with the US S&P 500, the lagging German DAX (relative to the S&P) seem to demonstrate such difference.

Finally to reemphasize, the breakdown of the Shanghai index continues to deepen.

Applied to the Phisix, which I think remains on the bullish phase of the current bubble cycle, the above signs or developments should keep us on our toes or should make us remain partly on the defensive.

However as caveat, we cannot simply read and project all these as the prospective trend.

Since the de rigueur trend in policymaking, which marks the difference from 2008 or anytime in history, has been a more activist approach where authorities have been quick to respond to the developments in the markets, any prospective actions will likely impact the markets anew (relatively depending on scale and in meeting with market's expectations).

The FOMC’s reluctance to undertake a direct QE is understandable. The FED may have observed that there has been an accelerating upside trend in US monetary aggregates. And more QE will only risk adding to inflationary pressures, so they may be reserving this option until (political and financial) conditions warrant.

Nevertheless the above quote from the Bloomberg only reveals how addicted financial markets have been to inflationism.

Rest assured that this political dynamic as major driver of the markets won’t fade away anytime soon and should continue to dominate the actions in the global marketplace.

Challenging times indeed.