- Investors are focusing on the trade talks but strategists say liquidity is the main reason behind the stock market rally.
- Injection of liquidity creates favorable financial conditions for businesses to prosper.
- Research indicates that 2020 will see a continuation of the stock rally.
Although the majority of investors are focused on the phase one trade deal, strategists are looking at one major driving factor of the recent stock market rally. And that is the injection of liquidity.
This week, the New York Fed added $86.4 billion to stabilize short-term borrowing rates. The injection follows similar operations since September when central bankers rushed to rescue the overnight repo market.
Liquidity injection boosts stocks
Allianz chief economic adviser Mohamed El-Erian says the U.S. currently has the most relaxed financial conditions since 2009.
A low benchmark interest rate is encouraging businesses to expand and the continuous injection of liquidity by the Federal Reserve is sustaining the momentum of the market.
During a liquidity injection or a repo operation, the Fed offers banks cash in exchange for collateral in the form of Treasurys or mortgage-backed securities. The extra capital gives banks more flexibility to meet short-term obligations and conduct other business operations.
The “relaxed” market created by the Federal Reserve has been the main driver of the stock market in recent months.
We’ve had the biggest relaxation of financial conditions since 2009. That’s an enormous statement and that’s why the markets are doing so well and have been so constructive. We’ve had massive injections of liquidity by the Fed. They don’t want us to call it quantitative easing (QE) 2 but it has the impact of a QE.
The Fed has stated it does not intend to increase the benchmark interest rate next year. That would maintain a favorable…