Liquidity conditions are worsening, which means recent volatility in markets is likely to continue and even get worse, a monthly liquidity gauge compiled by investment advisory firm Cross Border Capital shows.
The Global Liquidity Index fell again in September, to 45 from 48 in the previous month, mainly because of a slide in the pace of private sector cash flow generation.
Liquidity conditions were worse in nearly all regions.
“Sub-par liquidity conditions are a concern and question future economic expansion and the stability of World financial markets,” Cross Border Capital said in its monthly liquidity report.
Weakness in cross-border capital flows was another reason for the worsening in liquidity conditions.
This means that big companies in the US, Europe and Japan no longer create cash at the pace they were, signalling a weakening economy.
Liquidity Conditions by Region
There is a big difference between developed markets and emerging markets’ liquidity conditions.
Developed markets showed above-average conditions, with the index at 56.8 in September, compared with the 18.4 emerging markets index.
However, the developed markets’ index has been falling – it stood at 70.9 in February – while the emerging markets index has been flat.
The index’s “normal” liquidity conditions range between 0 and 100.
The main cause of the worsening of liquidity conditions in developed countries has been the shrinking of private sector liquidity, which fell from a peak of 81.6 last year to 70.5.
The US private sector liquidity sub-index fell to 79.9 from a peak of 96 late in 2013; in the UK, the index fell to 60.1 from 85.7 and in Japan it halved to 41.4.
“Even the eurozone, which started low and tried to recover, sank back in September,” the Cross Border Capital report said.
The recent US dollar strength adds to the problem, as central banks across the world – and especially in emerging markets – have to keep their monetary policy tight to prevent their currencies from depreciating too much against the dollar.
The most worrying region in terms of worsening liquidity conditions is Asia, where the index fell to 27, the lowest reading since 2012.
This is mainly because of the slowdown of the private sector in China, despite the attempts by the People’s Bank of China to inject liquidity in the system.
In other emerging markets, liquidity conditions show increased volatility.
The worsening liquidity conditions across the world signal that markets have entered a phase of speculation this year from last year’s calm.
“Troublingly, this means that 2015 suggests an upcoming turbulence phase,” the Cross Border Capital report concluded.