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Global liquidity is shrinking and that’s no bad thing

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After a year of record-breaking cash injections, the world’s big central banks are starting to ease off the stimulus pedal, forcing economies and financial markets to practise walking on their own again.

Not everyone is dismayed at the prospect. Since March 2020, central banks and governments have flooded markets with some $27 trillion – a third of global gross domestic product, consultancy CrossBorder Capital estimates.

Since then, world stocks have surged 85%, economic growth is rebounding from last year’s pandemic-inflicted devastation, and inflation expectations are rising. Continuing to pump out cash at last year’s pace would do more harm than good, some economists argue.

Still, cheap cash remains plentiful. At the end of March, 82% of central banks were running loose monetary policies, CrossBorder estimates, though that is down from 88% in January.

Last month the Bank of Canada began tapering its asset purchases and signalled it could raise interest rates next year, while the Bank of England this month slowed its money-printing. Others, including the Federal Reserve, may start scaling back stimulus by the end of the year.

In other words, the growth of liquidity – the catchphrase for all that money pumped in by central banks, private lenders and governments – has peaked and is already waning.

Total liquidity from central banks and private financial institutions in the United States, China, euro zone, Japan and Britain topped 28.8% of GDP last year but is now running at 18.5%, estimates Steve Donzé, senior macro strategist at Pictet Asset Management.

The main drag is China, he says, which has halved its liquidity additions from last year’s peak.

Global money supply has dipped to 24% from last year’s peak of 26%, but is way above its pre-pandemic levels of 10%. (Graphic: 3-month growth of Global M2 ex China, https://fingfx.thomsonreuters.com/gfx/mkt/qmyvmeyyxvr/Pasted%20image%201621424406439.png)

The other big stimulus plank was government spending but as lockdowns end, so do emergency support schemes for workers and businesses.

Some central bank policy tightening may be offset by U.S. President Joe Biden’s stimulus plans, which if approved, could top 15% of GDP. But much of that is to be financed through tax rises, limiting its stimulatory effect.

JPMorgan strategist Nikolaos Panigirtzoglou said that on all commonly-used measures of gauging “excess liquidity” the extraordinarily loose conditions of 2020 appear to be tightening.

First, money supply growth has been falling relative to GDP since January, he notes, a reversal of 2020.

“That means we may already have entered a phase where excess liquidity is being contracted,” Panigirtzoglou said.

Second, the cash holdings of global investors relative to the size of their equity and bond holdings are now “exceptionally low”. It means stock markets “must rely on other things like the growth trajectory to sustain the bull market”. (Graphic: Pace of central bank purchases falls in 2021, https://fingfx.thomsonreuters.com/gfx/mkt/oakpekyjdpr/Pasted%20image%201621423590115.png)

TIME TO TAPER?

Since the 2008 crisis, markets have become hooked on ever-increasing sums of cash ploughed in by central banks. Past attempts to cut money-printing, such as in 2013 and late-2018, sowed market panic, forcing policymakers to backtrack.

But today’s backdrop, with economies recovering strongly and bond markets finally pricing in the return of inflation, looks different.

Property markets, fed by abundant liquidity, may be overheating; house prices are rising at an annualised six-month rate of more than 10%, according to data from the Bank of International Settlements analysed by CrossBorder Capital.

So piling on more stimulus risks an inflation explosion and overheating, some economists warn. Larry Summers, advisor to former President Barack Obama, accused the Fed this week of “dangerous complacency” in keeping policy so loose.

Pictet’s Donzé too believes the Fed should kick off tapering by year-end “before excesses emerge and force a drastic tightening that could derail current expansion.”

The Fed, ECB, BoE and the Bank of Japan could shrink asset purchases this year to about $3.4 trillion from almost $9 trillion last year, BofA estimates.

But that’s still huge by pre-2020 standards. Aside from the Bank of Canada, big central banks will likely end 2021 with significantly bigger balance sheets.

Norman Villamin, chief investment officer at Swiss wealth manager UBP, said that given policymakers’ recent experience of trying to tighten and their focus on job creation, “if policymakers are going to make a mistake, it will likely be a mistake of erring on the side of being too easy rather than becoming too tight too soon.” (Graphic: Central bank balance sheet projections, https://graphics.reuters.com/HEALTH-CORONAVIRUS/jznvnjmjzvl/chart.png)

 

(Editing by Sujata Rao and Hugh Lawson)

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Trudeau says he discussed border with Biden, but no deal

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Prime Minister Justin Trudeau said on Sunday he has spoken with U.S. President Joe Biden about how to lift pandemic-related border restrictions between the two countries but made clear no breakthrough has been achieved.

U.S. and Canadian business leaders have voiced increasing concern about the ban on non-essential travel in light of COVID-19 that was first imposed in March 2020 and renewed on a monthly basis since then. The border measures do not affect trade flows.

The border restrictions have choked off tourism between the two countries. Canadian businesses, especially airlines and those that depend on tourism, have been lobbying the Liberal government to relax the restrictions.

Canada last week took a cautious first step, saying it was prepared to relax quarantine protocols for fully vaccinated citizens returning home starting in early July.

Trudeau, speaking after a Group of Seven summit in Britain, said he had talked to Biden “about coordinating measures at our borders as both our countries move ahead with mass vaccination.” Canada is resisting calls for the border measures to be relaxed, citing the need for more people to be vaccinated.

The United States is ahead of Canada in terms of vaccination totals.

“We will continue to work closely together on moving forward in the right way but each of us always will put at the forefront the interests and the safety of our own citizens,” Trudeau told a televised news conference when asked the Biden conversation.

“Many countries, like Canada, continue to say that now is not the time to travel,” Trudeau added, though he said it is important to get back to normalcy as quickly as possible.

 

(Reporting by David Ljunggren in Ottawa; Editing by Will Dunham)

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Man with 39 wive dies in India

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A 76-year-old man who had 39 wives and 94 children and was said to be the head of the world’s largest family has died in north east India, the chief minister of his home state said.

Ziona Chana, the head of a local Christian sect that allows polygamy, died on Sunday, Zoramthanga, the chief minister of Mizoram and who goes by one name, said in a tweet.

With a total of 167 members, the family is the world’s largest, according to local media, although this depends on whether you count the grandchildren, of whom Ziona has 33.

Winston Blackmore, the head of a polygamous Mormon sect in Canada, has around 150 children from 27 wives – 178 people in total.

Ziona lived with his family in a vast, four-story pink structure with around 100 rooms in Baktawng, a remote village in Mizoram that became a tourist attraction as a result, according to Zoramthanga.

The sect, named “Chana”, was founded by Ziona’s father in 1942 and has a membership of hundreds of families. Ziona married his first wife when he was 17, and claimed he once married ten wives in a single year.

They shared a dormitory near his private bedroom, and locals said he liked to have seven or eight of them by his side at all times.

Despite his family’s huge size, Ziona told Reuters in a 2011 interview he wanted to grow it even further.

“I am ready to expand my family and willing to go to any extent to marry,” he said.

“I have so many people to care for and look after, and I consider myself a lucky man.”

 

(Reporting by Alasdair Pal and Adnan Abidi in New Delhi; Editing by Raissa Kasolowsky)

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Huawei CFO seeks publication ban on HSBC documents in U.S. extradition case

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Huawei Chief Financial Officer Meng Wanzhou on Monday will seek to bar publication of documents her legal team received from HSBC, a request opposed by Canadian prosecutors in her U.S. extradition case who say it violates the principles of open court.

Meng’s legal team will present arguments in support of the ban in the British Columbia Supreme Court.

Meng, 49, was arrested at Vancouver International Airport in December 2018 on a warrant from the United States, where she faces charges of bank fraud for allegedly misleading HSBC about Huawei Technologies Co Ltd’s business dealings in Iran and potentially causing the bank to break U.S. sanctions on business in Iran.

She has been under house arrest in Vancouver for more than two years and fighting her extradition to the United States. Meng has said she is innocent.

Lawyers for Huawei and HSBC in Hong Kong agreed to a release of the documents in April to Meng’s legal team on the condition that they “use reasonable effort” to keep confidential information concealed from the public, according to submissions filed by the defense on Friday.

Prosecutors representing the Canadian government argued against the ban, saying in submissions filed the same day that “to be consistent with the open court principle, a ban must be tailored” and details should be selectively redacted from the public, rather than the whole documents.

A consortium of media outlets, including Reuters News, also opposes the ban.

The open court principle requires that court proceedings be open and accessible to the public and to the media.

It is unclear what documents Huawei obtained from HSBC, but defense lawyers argue they are relevant to Meng’s case.

Meng’s hearing was initially set to wrap up in May but Associate Chief Justice Heather Holmes granted an extension to allow the defense to read through the new documents.

Hearings in the extradition case are scheduled to finish in late August.

 

(Reporting by Moira Warburton in Vancouver; Editing by Howard Goller)

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