Fidelity International

Chart Room: A liquidity tide for the record books

28 January 2021

By Steve Ellis Global CIO, Fixed Income

This week’s Chart Room looks at how the unprecedented flood of dollar liquidity is likely to impact asset markets and monetary policy as we move through 2021.

Among other unprecedented developments, 2020 brought us new high-water marks in the US for both money supply growth and the personal savings rate. This week’s Chart Room looks at the global ripple effect, after US M2 money supply at the end of 2020 rose by a record 24 per cent year-on-year, the biggest increase since records began before the Great Depression. It remains sharply elevated. Meanwhile, the US personal savings rate peaked at 33.7 per cent in April, but has since fallen back to more normal levels, an encouraging sign that US consumers, who account for nearly 70 per cent of the world’s biggest economy, are spending once again.

At a global level, the dollar value of world money supply rose 17 per cent last year to USD104 trillion. We think this scale of monetary accommodation (i.e. balance sheet expansion) is likely to carry on. In a world with zombified growth, central banks have to prop up a system which relies on increasingly negative real yields to service debt.

A rising tide

This flood of dollar liquidity is seeping into all aspects of asset markets, and the impact is overwhelming in the absence of real productive utilization in the economy. In our view, this will likely benefit risk assets including corporate bonds, equities, and popular carry trade currencies, despite valuations looking stretched in some areas. But this will come at a cost, including a structural dollar downtrend. In addition, I expect inflation will rear its head in 2021.

But the worry is that real yields will begin to rise once we see the lockdowns end. There are already early signs of this in recent weeks. If yields do continue to climb, and inflation ticks upwards, we could see a UST yield curve tantrum (i.e. a steeper curve), which would in turn cause a temporary widening in credit market spreads (and a corresponding temporary selloff in equities, particularly tech).

That said, I don’t think such a selloff would be prolonged. Central banks cannot sit idly by and watch real yields go higher. These days, the system only clears with real yields being driven more and more negative. There’s simply too much debt outstanding. The Fed can’t put the toothpaste back in the tube.

About Fidelity International

Fidelity International offers investment solutions and services and retirement expertise to more than 2.5 million customers globally. As a privately held, purpose-driven company with a 50-year heritage, we think generationally and invest for the long term. Operating in more than 25 countries and with $706.3 billion in total assets, our clients range from central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals.

Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances, other than when specifically stipulated by an appropriately authorised firm, in a formal communication with the client.

Fidelity International refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America. This communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required.

Unless otherwise stated all products and services are provided by Fidelity International, and all views expressed are those of Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited.

Investors should note that the views expressed may no longer be current and may have already been acted upon. CC21/02

ENDS