The following is an excerpt from William Watts | September 27, 2015 | marketwatch.com |
Cash is on track this year to outperform both stocks and bonds, something that hasn’t happened since 1990, according to Bank of America Merrill Lynch. And it might all be down to the notion that central bank-fueled liquidity has peaked.
Year-to-date annualized returns are negative 6% for global stocks and negative 2.9% for global government bonds, according to analysts led by Michael Hartnett in a Friday note. The dollar is up 6% and commodities are down 17%, while cash is flat.
Here’s what this has to do with the liquidity story:
[Quantitative easing] & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash [crashes] (oil, UST, CHF, bunds, SPX) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.
The note speaks to what has become a very important theme for investors. While the Bank of Japan and the European Central Bank continue to provide quantitative easing, the Fed has stopped its asset purchases and is moving toward lifting rates from near zero, as is the Bank of England. The notion that liquidity has peaked and that financial markets must now adjust to that new dynamic.
Indeed, billionaire hedge-fund investor David Tepper earlier this month argued that as China and other emerging-market central banks shed foreign reserves, liquidity is no longer flowing one direction, making for more volatile conditions.
Back to the note. The strategists observed that September has been marked primarily by a “risk-off” theme across markets.
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