The godfather of liquidity says it still has another 20% stock market sell-off

As earnings season kicks off, it’s worth noting what investors have learned so far. The short version, except for a few isolated companies (cough, Netflix, cough), isn’t a complete set: The expected rise in earnings per share for the S&P 500 this year is 8.9%, compared to 8.1% at the end of March, according to S&P Global Market Intelligence.

But even as the earnings outlook improved, the market struggled with the S&P 500 SPX,
-3.63%
Down 6% this month so far. what’s going?

Well, reserves at the Federal Reserve fell by $460 billion last week, which according to Citigroup was the biggest weekly drop ever. So let’s hear what that means from Michael Howell, aka the godfather of global liquidity, and CEO of CrossBorder Capital, a store he set up in 1996 after he headed the research teams at Baring Securities and Salomon Brothers. Howell explained to Jack Farley of Blockworks Macro that with global liquidity rather than market liquidity, it means the ability to change investment positions relatively easily. “If you put more liquidity in the financial system, what happens is you reduce systemic risk, because it is much easier for any particular entity to get financing, and if financing is easy, people will move along the risk curve to higher-risk instruments, ” He said.

Central banks, through monetary operations, control a large part of the liquidity. It also monitors the actions of commercial banks, shadow banks, large corporations such as Microsoft and Alphabet, and cross-border investors. In response to rising inflation, about 95% of central banks around the world are tightening. The Federal Reserve, in the minutes of the last meeting of the Federal Open Market Committee, outlined a plan to reduce its balance sheet by about $2 trillion.

Howell says a normal tightening cycle would cause the S&P 500 to drop by about 15%, if a recession was thrown over the top, that’s a 30% drop, and if there’s a banking crisis on top of that, there’s a 50% drop. “I don’t think we’re going to get the third, I think we get more than the first, so I’m in the middle and it’s about a 30% retracement from top to bottom,” she said.

Since there is about a 10% pullback from the peak, Howell says another 20% drop is coming.

“The point to remember about the financial system is that, contrary to what the economics profession says and economic textbooks make clear, the financial system is not so much a new financial system as it is, in fact, a refinancing system,” Howell says. With about $300 trillion in global debt and an average maturity of about five years, about $60 trillion needs to be refinanced each year.

This drop in liquidity has already been seen with the collapse of the USDJPY,
-0.74%And
Treasuries yields rise, commodity prices rise. The increased volatility makes it difficult for people to borrow against those collateral because lenders will demand more margin. Howell says his liquidity index is about to enter ‘turbulent investing territory’

Howell also said that market leadership — utilities and brands that outperform cycles and technologies — and yield curve say investors want safety and that a recession is increasingly likely.

commotion

Twitter TWTR,
-0.18%
The Wall Street Journal, citing people familiar with the matter, reported that the board of directors is suddenly poised to bid for Elon Musk now that it has secured funding. Bloomberg News said the talks are at the final stage.

The Chinese capital, Beijing, appears to be heading toward the strict lockdowns seen in the financial hub of Shanghai in response to the new COVID-19 outbreak.

The European Parliament and EU member states over the weekend approved a proposed digital services law, which would force tech companies to take more responsibility for content on their platforms.

French President Emmanuel Macron easily defeated his far-right rival Marine Le Pen. The German Ifo Business Climate Index rose in April from a 14-month low in March.

The People’s Bank of China said it cut its foreign exchange reserve requirement by a full point, after the dollar’s recent rally against the yuan (USDCNY),
.

Coca-Cola Co,
-2.39%
It beat earnings estimates, as the organic growth guidance was just a shy of consensus.

market

US stock futures ES00,
+ 0.24%

NQ00,
+ 0.30%
She was referring to another sharp drop, after Friday’s 981-point drop in the Dow Jones Industrial Average,
-2.77%.

Crude Oil CL.1,
-0.53%
Futures fell, the yield on the 10-year Treasury TMUBMUSD10Y fell,
2.889%
It fell to 2.83%.

The most important indicators

Here are the most active stock market indicators on MarketWatch as of 6 AM ET.

ribbon

Safety name

TSLA,
-0.77%

Tesla

GME,
-3.28%

Jim Stop

AMC,
-2.17%

AMC Entertainment

NIO,
-1.36%

New

TWTR,
-0.18%

Twitter

NFLX,
-4.59%

Netflix

AAPL,
-3.66%

apple

NVDA,
-6.24%

nvidia

CENN,
-3.42%

Centro Electric

Mullen,
-2.94%

Mullen Cars

random readings

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This Japanese man married a fictional character.

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