02.24.2012

Liquidity is Abundant

02.24.2012
Terry Flanagan

Traders may expect more liquidity across all markets, but have policy makers to thank, according to buy-side asset manager.

Markets around the world can rejoice from Central Bank decisions to ease monetary policy and pump liquidity into the capital markets with the hopes of promoting lending. Positive reactions have been seen through recent January and February stock market rallies.

“We’re positive on equities since we feel they’re likely to post further gains, though at a slower pace due to volatility,” said John Praveen in a statement, chief investment strategist of Prudential International Investments, noting that he is eyeing emerging markets. “We have increased the overweight in emerging markets due to interest rate cuts by the Central Banks of China, India, Brazil and Russia.”

Additionally, the developed markets also remain keen on easing liquidity into the global capital markets. The European Central Bank (ECB) is expected to inject liquidity through more long-term refinancing operations of up to possibly €1 trillion, according to Prudential data.

While global monetary policy has boosted global equities, the Eurozone remains the black mark, currently representing the world’s most illiquid trade with details still need to be worked out with Greece’s bail-out and restructuring plans.

“There will be more policy easing and more liquidity released into the economy,” said a local Chinese market observer. Europe is currently China’s biggest trading partner, comprising of roughly 18% of the nation’s overseas shipments, according to Shenyin & Wanguo Securities, a Chinese integrated financial services company.

There is abundant liquidity globally, due to low interest rates and most likely, further interest rate cuts, according to Praveeen.

“The stiff interest rate headwinds of 2011 have turned into strong tailwinds in 2012 with interest rate cuts and policy easing, asset purchases and other liquidity measures,” he said, citing that “macro data has improved,” largely to the resolution of the Eurozone-Greek crisis.

Most of the recent optimism should remain among equity traders, according to Praveen, who remains cautious about bonds. Despite a rally in global government bonds within the last couple months, fixed income still remains “under pressure,” and “expensive,” with yields under pressure, he said, citing that most of December and January posted flat yields.

Yields declined in the U.S., Eurozone, and Japan, but were flat in the U.K. in January. Further, yields fell even more sharply in the emerging markets. The J.P. Morgan Global Bond Index rose modestly by 0.7% in January after a stronger 2.1% in December.

“Given the recent Greek bailout and restructuring deal, the risk of a disorderly default in the near-term has decreased, reducing the safe haven appeal of bonds,” said Praveen.

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