10/09/18

Global liquidity is drying up | FT Alphaville

Global liquidity is drying up | FT Alphaville

Global liquidity is drying up

On October 27, 1997 the S&P 500 fell nearly 7 per cent as contagion from Asia's currency crisis spread globally. About a year later, Russia's debt default and the collapse of hedge fund Long-Term Capital Management sparked a 20 per cent decline in the S&P 500.

In August 2015, fears of a hard landing in China, following a surprise 2 per cent devaluation in the currency, led the S&P 500 into correction territory.

On the heels of each of these episodes, points out Paul Ashworth at Capital Economics, the Federal Reserve demurred from hiking interest rates, and in some cases, it cut them. Of course, domestic factors played a role in all of these scenarios, but whatever was taking place abroad certainly factored in.

There's been some speculation in recent weeks that the ongoing rout in emerging markets could prompt a similar pause. On Wednesday, the Fed put that notion to bed, signalling a rate hike as early as next month. This has been the Fed's plan for some time now, but as central banks around the world tighten too, global liquidity is draining at a far faster pace — a trend that could embroil some debt-heavy emerging markets and potentially the US itself.

Since January, the number of rate hikes globally has increased quite a bit. According to a six-month rolling sum of global central bank rate hikes compiled by Bank of America Merrill Lynch, we're nearing pre-Lehman levels:

Given this tightening — much of which traces back to emerging markets trying to stem currency tremors or ....

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