Global financial markets have been experiencing a gradual accumulation of new highs in stock indices since the beginning of the year. This trend can be attributed to the resilience of the US economy, which has helped restore investor confidence. Despite interest rate hikes, the job market in the US has remained competitive, contributing to the overall positive sentiment. The disinflation process has also had a positive impact on consumer sentiment and the markets. The decisions made by the Federal Reserve (FED) have played a significant role in shaping market dynamics, with the slowing pace of balance sheet reduction being seen as a relief. Additionally, the US has implemented a buyback of US bonds to reduce volatility and tensions in the bond market. Synchronized interventions between different central banks, such as the Bank of Japan, are also important factors to consider. The growth of M2 money supply indicates impending robust economic growth. The increased liquidity in the market has led to euphoria over risk assets, as observed with the surge in meme stocks and altcoins. Several indicators point to an improvement in liquidity in the coming months, which could potentially lead to a melt-up in financial markets and boost riskier assets. However, caution is advised in such situations [5e12fdec].
US asset prices, including equities, gold, cryptocurrencies, and industrial metals, are rising despite a contraction in money supply. Gavekal Research strategists note that this is a divergence from the typical correlation where excessive money supply growth favors asset price increases. Non-monetary factors such as the rollout of artificial intelligence and strong corporate earnings are believed to be influencing asset prices. The market anticipates a loosening of US monetary policy, which could lead to renewed growth in money supply. However, there are concerns that if the drivers supporting asset prices weaken, prices may decline. Most asset prices have shown signs of softening in the past few days [10709b80].