Head of Macroeconomic Research
Summary: This is the first edition of the Saxo Liquidity Dashboard. We believe that in the era of central bank power and USD dominance, it is of prime importance to track the evolution of central bank liquidity and USD liquidity. Our dashboard features a number of indicators that will give you some clues about the direction of the global economy and financial markets and will help you formulating your investment decisions.
Following Powell Pivot in early 2019, global central bank liquidity has headed north. The chart below tracks the evolution of total liquidity injection by the 22 biggest global central banks. Based on preliminary data, we expect that global central bank liquidity will turn positive in Q2 2020 for the first time since mid-2018 on the back of positive impulse from the Fed, the PBoC and the BoJ. The BoJ’s liquidity injections are so far the most important contributor to global CB liquidity, representing almost 0.4 percentage point of global GDP.
We observe the same reversal trend in global USD liquidity. Our below model is based on the evolution of the monetary aggregate M2 in the 25 largest economies, converted into USD and minus the evolution of M3 in the United States. We think that this chart tell us much more than any other on what will happen in 2020 in financial markets. Since Spring 2019, our liquidity indicator has returned in positive territory after a short-lived contraction in 2018 reflecting the Fed normalization process. An improvement in global USD liquidity tends to favor risky assets over safe havens (notably USD and JPY) and is consistent with our positive narrative for the global economy in 2020.
Another positive signal is that the risk of dollar shortage, which has been widely mentioned in Q3-Q4 2019, has been contained by the Fed repo interventions. In the below chart, we use as a proxy the evolution of excess dollars in the US banking system. We see the inflow of USD in the financial system is supportive to the equity market (in this example the MSCI World) and to risky assets (such as the EUR).
Our assessment for 2020 is that global CB liquidity and USD liquidity will continue to grow which will lower USD funding costs, help EM assets, the EUR and the equity market and it will bring a welcome support to the global economic outlook.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
