Analysis: Global liquidity swell to spill into 2014

Wed Oct 30, 2013 2:52am EDT
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By Mike Dolan

LONDON (Reuters) - After a bone-dry summer, world markets seem awash with cash again and it looks like spilling into 2014.

Even though the U.S. Federal Reserve has kept its $85 billion-a-month of bond buying constant throughout, fevered speculation surrounding its easy money spigot has by itself dictated the massive ebb and flow of liquidity seen this year.

The rethink of Fed intentions after September 18 - when the central bank declined to cut back its asset purchases as expected - has raised all financial boats in one big wave.

Since the Fed demurred six weeks ago, the S&P500 index of top Wall St stocks has jumped 3.5 percent. So too have 10-year U.S. Treasury bonds. High-yield corporate "junk" bonds are also up more than 3 percent, as are gold and the euro. Even indices of the most esoteric and speculative 'frontier markets' have added more than 3 percent.

The global surge has been remarkable as an evaporation of this year's U.S. dollar's gains has removed huge pressure from emerging market currencies and, in turn, eased the strain on some $7.2 trillion of emerging central bank reserves. And given these reserves are largely banked in western bonds, a virtuous circle of liquidity appears to have formed.

And by pumping up the euro and Japanese yen, the retreating dollar has upped chances of further easing - quantitative or otherwise - by the Bank of Japan and European Central Bank.

The global liquidity pool - one seeded by central banks and supercharged by the markets themselves - seems to expand anew.

Major stock markets from Tokyo, London, Frankfurt and New York have now clocked up year-to-date gains of between 20 and 30 percent and the latter two are in uncharted territory. Property hotspots in many of the same locales are similarly motoring.   Continued...

A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013. REUTERS/Carlo Allegri