How are you looking at the global liquidity situation? Some surveys seem to suggest that money managers globally are reducing their positions as far as emerging markets are concerned. How is the liquidity moving in your view?
There are different definitions of liquidity. It is important to spell those out clearly. The main market liquidity measures are sort of a benchmark of what is happening to risk sentiment, but in terms of financial liquidity there are pots of money floating around looking for a home. The overnight balance with the Fed on its reverse repos is getting close to $800 billion and therefore practically no money at all every single day. There is a lot of cash floating around but there is also a lot of uncertainty.
I do not think anybody has despondently talked about the gains that emerging market indices have made. They have done pretty well. People either want to pile more into that right now or they are being cautious without selling. So, it is sitting around. There is a very strong opposing camp. A lot of people wanted to put that money to work. Whether it is currency markets, bond markets or equities, it is very rangy at the moment. There is a lot of money out there but all those opposing forces are just neutralising each other and nothing is really going anywhere.
How are you looking at the odds as far as risky assets are concerned? If rates start rising or surplus liquidity from global central banks start tapering by FY23, when do you think financial markets globally will start positioning for that event?
To a certain extent, people are already doing this a bit. US data show very strong inflation numbers. One day, it is the bond market selloff and you get yields pushing higher the very next day and then there is panic thinking the Fed is going to bring forward rate tightening and it swings all the way back again. People start pricing in more to the front end of the yield curve or start pushing at the direction of inverted yield curves and recession indicators too soon. But that shows the amount of liquidity that is out there.
People are worried about losing the gains that they have made and we are going to see a very jittery market, moving closer to a decision on tapering even if the actual taper itself would not happen until 2022. Our best guess is to start early in 2022 or we might get hints about that at Jackson Hole or at the September FOMC meeting. Every time, there is a hint, the markets are going to have a convulsion one way or another.
As people start to price in and digest those sorts of movements, it is likely to lead to convulsions and retching periods in markets as we move to something more normal and that should not be what we actually want to happen.
