The worst liquidity crunch since the Lehman Brothers crisis will be the stock market’s biggest hurdle this summer, says JPMorgan’s chief equity strategist

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Traders work on the floor of the New York Stock Exchange during morning trading on May 05, 2022 in New York City.Michael M. Santiago/Getty

  • The worst liquidity crisis since the collapse of Lehman Brothers in 2008 will be a big headwind for the stock market this summer, according to JPMorgan.

  • The bank’s chief market strategist, Marko Kolanovic, warned that the expected drop in liquidity could add to recession fears.

  • “Broad liquidity in the United States … will contract by another $1.1 trillion by the end of the year,” Kolanovic said.

The biggest liquidity crisis since the collapse of Lehman Brothers in 2008 could be the most serious headwind for the stock market this summer, according to JPMorgan.

The bank’s chief global markets strategist, Marko Kolanovic, warned investors in a Wednesday note that a host of factors could trigger a liquidity drop of more than $1 trillion and add to fears of a recession. imminent.

“Broad liquidity in the United States, which we define as M2+ institutional money market fund assets, will contract by an additional $1.1 trillion by the end of the year, bringing the total decline for 2023 to $1.7 trillion. In annual terms, this would represent the worst liquidity contraction in the United States since that seen after the Lehman crisis,” Kolanovic said.

Drivers of the expected liquidity crunch include the Fed’s continued drawdown of its balance sheet at a rate of nearly $100 billion a month, with the US Treasury bolstering its general account through the issuance of a flood of bonds this summer following the debt ceiling agreement, and the continued shift of US bank deposits to money market funds.

A sharp drop in liquidity in the United States is unlikely to be offset by the rest of the world, Kolanovic said. He pointed to the fact that the liquidity of the banking system in the euro zone has decreased by 1,000 billion euros since November 2022, and that 477 billion euros of loans to come mature by the end of June, which which should further harm liquidity conditions.

Meanwhile, Kolanovic thinks some foam has returned to tech stocks in recent months, due to the huge hype in AI stocks, and it looks like a bubble. That, combined with lower liquidity, means stocks are more likely to fall than rise, according to Kolanovic.

“The consensus view that the worst pressures are behind us is likely to be disproved, as the impact of monetary tightening has always worked with some lag and some supports for growth are fading, such as excess savings and margins. In our view, equities are set to face an increasingly difficult growth-policy trade-off in 2H,” Kolanovic said.

“This sharp contraction in deposits would not mean there would be less cash or cash to invest in financial assets, but it would put more pressure on the US banking system if these deposit outflows end up hitting vulnerable regional banks. For us, this is another rationale for a cautious stance on risk assets,” Kolanovic said.

Read the original article on Business Insider

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