Cash shifts pull the rug out from under stock markets – strategists

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this illustration, January 21, 2016. REUTERS/Jason Lee

LONDON, April 25 (Reuters) – A sudden drop in U.S. stocks late last week, which turned into broad-based weakness in global markets on Monday, can be attributed to sharp shifts in large pools of liquidity from the central bank rather than warmongering rhetoric from global policymakers. .

In a note on Monday, Matt King, global markets strategist at Citibank, noted that US Federal Reserve reserves fell $460 billion last week, the biggest weekly drop on record.

US equities are set to get off to a tough start this week with index futures down 1%. Wall Street fell more than 2.5% on Friday, marking a third straight week of losses for the S&P 500 (.SPX) and Nasdaq (.IXIC).

In a note titled “Sudden Stealth QT = Weaker Markets,” King estimates that a $100 billion drop in reserves translates to a 1% drop in stocks, referring to quantitative tightening or bank policy. power plants that drain excess liquidity from the markets by its popular acronym.

“QT is likely to make the outlook for global liquidity for the rest of this year look much more like the first quarter than the markets’ spring break of recent weeks,” he said.

Global stocks posted their worst quarter this year since the coronavirus pandemic wreaked havoc in March 2020, while US stocks are down nearly 12% from their peak earlier this year.

In a separate note released on Monday, Morgan Stanley strategists said U.S. equities should join a bear market, with defensive stocks offering little upside and margin and earnings per share likely peaking.

“Defensives being the last great overperformers, they are now expensive, leaving very few places to hide,” Morgan Stanley said in a note. “This suggests that the S&P 500 will finally catch up with the average price and enter a bear market.”

Reporting by Saikat Chatterjee Editing by Mark Heinrich

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