Global Liquidity Updates

The UK gilt market is once again making headlines as bond prices fall and the pound weakens.

The last time we saw a similar situation was in 2022 when policymakers had to intervene to prevent the UK's debt market from collapsing.

That intervention played a key role in influencing the US FED to resume printing money, kick-starting the current bull market.

Across the Atlantic, concerns are also mounting.

The DXY remains strong, and inflation expectations are rising.

Last Friday, markets dropped as strong economic data reignited fears of inflation returning sooner than anticipated.

Consequently, market expectations for rate cuts this year have nearly vanished.

Rising inflation is also driving US Treasury yields higher, making borrowing more expensive for companies and banks.

As we've noted before, inflation poses a significant constraint on liquidity flows.

With the upcoming inflation report on Wednesday expected to show an increase - exacerbated by rising oil prices - these concerns are unlikely to subside.

While the outlook may seem grim, history suggests a potential silver lining.

Both the UK and US bond markets, coupled with a strong DXY, have the capacity to cause major financial disruptions.

However, policymakers have historically stepped in to stabilize markets when faced with such breaches.

Should conditions worsen, a similar intervention can likely be expected.

On the DXY, our stance remains unchanged: while a strong dollar might temporarily aid Trump's trade negotiations, the global economy benefits from a weaker dollar in the long run.

In short, the Fed and other central banks face mounting pressure to maintain liquidity and ensure smooth money flow within the system.

Our Global Liquidity Index declined by $2.754T, representing a 2.16% drop this week.

Liquidity momentum remains weak, with the 3-month rate of change still trailing the 12-month rate of change.

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Another push toward the key S/R level at 103k.

Without liquidity injections, this level could prove challenging to break.

That said, the potential of a Bitcoin Strategic Reserve may be enough for the market to sustain a bullish outlook - at least for Bitcoin.

From a psychological perspective, 100k isn't a resistance level anymore, as it has been a target for far too long.

However, that doesn't mean it instantly becomes an attractive buying level for the market either.

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China's recent monetary policy shifts aim to bolster long-term economic stability but come with short-term hurdles.

The transition to a "moderately loose" stance, coupled with strategic rate cuts, reflects efforts to stabilize amidst global challenges.

Yet, these small steps may fall short without bolder action.

In the US, the TGA has dipped below $700 billion and could decline further as debt ceiling debates drag on.

Meanwhile, the MOVE Index signals a temporary calm in bond market volatility.

Central banks, including the Federal Reserve, remain cautious, holding off on significant liquidity injections.

The DXY weakened today following rumors of a universal tariff plan, which would be applied to only certain sectors, by Trump—only to partially rebound after he dismissed the claims as "fake news."

Still, the narrative hints at a strategic use of dollar strength in trade negotiations and likely, its strength will "disappear" post-inauguration, when a bunch of deals are already set in place.

This potential "bluff" tactic could very well lead to a bullish environment for risk assets.

Our Global Liquidity Index declined by $0.613T this week, representing a 0.48% drop.

Liquidity momentum remains weak, with the 3-month rate of change still trailing the 12-month rate of change.

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