• The worst liquidity crunch because the 2008 Lehman Brothers collapse will probably be an enormous headwind for the inventory market this summer time, in line with JPMorgan.
• The financial institution’s chief market strategist Marko Kolanovic warned that the anticipated liquidity decline may add to recession fears.
• “Broad liquidity within the US… will contract by one other $1.1 trillion from right here until year-end,” Kolanovic stated.

The most important liquidity crunch because the collapse of Lehman Brothers in 2008 may function essentially the most severe impediment for the inventory market this summer time, in line with JPMorgan.

The financial institution’s chief international markets strategist, Marko Kolanovic, warned buyers in a Wednesday word {that a} multitude of things may spark a greater than $1 trillion decline in liquidity and add to fears of an imminent recession.

“Broad liquidity within the US, which we outline as M2 + institutional cash market fund belongings, will contract by one other $1.1 trillion from right here until year-end bringing the whole decline for 2023 to $1.7 trillion. In year-over-year phrases, this may signify the worst US broad liquidity contraction since that seen after the Lehman disaster,” Kolanovic stated.

The driving forces behind the anticipated liquidity crunch embody the Fed’s ongoing discount of its steadiness sheet at a tempo of almost $100 billion per thirty days, the US Treasury increase its common account by way of the issuance of a flood of bonds this summer time following the debt ceiling settlement, and the continued shift from US financial institution deposits into cash market funds.

A pointy liquidity decline within the US is unlikely to be offset by the remainder of the world, Kolanovic stated. He highlighted the truth that banking system liquidity within the euro space has declined by €1 trillion since November 2022, and an anticipated €477 billion in upcoming loans is maturing by the tip of June, which ought to additional harm liquidity situations.

In the meantime, it is Kolanovic’s perception that some frothiness has returned to tech shares in current months, pushed by the massive hype in synthetic intelligence shares, and that it seems to be bubble-like. That, mixed with falling liquidity, means shares are extra susceptible to falling than rising, in line with Kolanovic.

“The consensus view that the worst of pressures is behind us will doubtless be confirmed flawed because the influence of financial tightening labored traditionally with a lag, and sure progress helps are waning, resembling extra financial savings and robust margins. In our view, shares are set to face an more and more difficult growth-policy tradeoff in 2H,” Kolanovic stated.

“This extreme deposit contraction wouldn’t imply that there could be much less liquidity or money to be invested in monetary belongings, however it might put extra pressure within the US banking system if these deposit outflows find yourself hitting weak regional banks. To us that is one other justification for a cautious stance on danger belongings,” Kolanovic stated.

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