To which the bulls seemed to be saying, “Tell me something I don’t know. “

Monday’s liquidation was sparked by the culmination of long-standing financial strains Evergrande faces, which has been accompanied by an avalanche of sales, although it was obvious on reflection that this was not the case. analogous to the failure of Lehman Brothers, which sparked the 2008-09 financial crisis.

JP Morgan’s quantitative and derivatives strategy team, led by Nikolaos Panigirtzoglou, reported that outflows from exchange-traded funds totaled $ 34 billion on Friday, September 17 and last Monday. These are the largest outflows since $ 26 billion on March 19 and $ 10 billion on March 22.

Based on the price development that followed, it would appear that there was a sharp reversal on Wednesday and Thursday with silver returning to the market as the

S&P 500
the benchmark rose 2.2%, its best two-day performance since July 21. This helped the index end the week up 0.51%, ending a two-week losing streak. Important to chart-watchers, the S&P 500 is back above its key 50-day moving average, below which it had fallen on the previous Friday.

Yet perhaps the most important movement has come in the bond market. The benchmark 10-year Treasury yield broke its recent trading range centered around 1.30% to 1.46%, the highest since July 1.

Oddly enough, most of the hike did not come on Wednesday, after Fed Chairman Jerome Powell practically confirmed what most central bank watchers had expected. That is, the Fed would start cutting its monthly securities purchases by $ 120 billion at the end of this year and likely close them in mid-2022.

The dot chart of the rate expectations of the various members of the Federal Open Market Committee showed that nine of the 18 members see the target range for federal funds, now 0% to 0.25%, taking off by the end of next year and certainly by 2023.

The bulk of the Treasury rate hike came on Thursday against a backdrop of a global safeguard in sovereign bond yields, following similar prospects from the Bank of England indicating a reduction in bond purchases and a shift from them. at its record key interest rates. With the notable exception of the European Central Bank, all of the major central banks are now aiming to exit extreme monetary stimulus.

That easy money helped swell the balance sheets of U.S. households, whose net worth hit a record $ 141.7 trillion as of June 30, according to new data released by the Federal Reserve last week. This reflected a $ 5.9 trillion increase in the last quarter, mostly driven by a $ 3.5 trillion increase in the value of their stock holdings and a $ 1.2 trillion advance on their real estate holdings. .

These gains do little to justify the Fed continuing to forcefully inject $ 1.44 trillion a year into the financial system. And the flow of juice will only slow down gradually, maybe about $ 15 billion a month.

What is not taken into account is that the excess liquidity that the Fed has pumped into the financial system is being absorbed in order to prevent money market rates from falling into negative territory.

As the central bank bought $ 80 billion in treasury bills and $ 40 billion in agency mortgage-backed securities each month, it swelled its balance sheet to over $ 8.4 trillion, or more than double the $ 4.1 trillion at the end of February 2020, before the pandemic flattened the economy and markets. But on Wednesday, a total of $ 1.4 trillion in excess liquidity was held at the Fed in reverse repurchase agreements, metaphorically an overflow reservoir, which will be available to the financial system once the central bank ends. to its purchases of securities.

To extend the plumbing metaphor, the financial system will continue to be overflowing with liquidity, as evidenced by real 10-year Treasury yields below 1.5% and just over 1% on equivalent Treasury securities protected against the inflation. Bulls apparently still see abundantly cheap money that they want to put to work, despite a few negative headlines.

Write to Randall W. Forsyth at [email protected]