By Morgan Stanley
According to Morgan Stanley, “Liquidity is slowing and poses a short-term risk. Although the Fed (USD 40bn/month through the RMP programme), the Treasury (USD 125bn in buybacks) and the reduction in capital requirements for banks (USD 200bn) have significantly boosted liquidity in Q1 … this momentum is slowing … with the RMP being reduced to USD 10bn/month and Treasury buybacks moderating.
This, coupled with China also aggressively slowing the growth of its money supply, higher oil prices and a stronger USD … means the liquidity environment is becoming less favourable.
Given that liquidity typically leads equities by around three months … this dynamic could pose a short-term risk … with the market likely to resume its upward trend when the USD, yields or oil prices fall … or when the liquidity boost from the Fed or the Treasury is reignited.”
