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Quantitative tightening? Oh please. Central banks, courtesy of the eurozone and Japan, are still buying financial assets with both hands. And that might be all you need to know about stock and bond market performance in 2017, say analysts at Bank of America Merrill Lynch.
The fact is that monetary authorities have snapped up a record amount of financial assets in the year to date, the analysts noted in their weekly “Flow Show” note published late Thursday. That’s despite all the focus on the Federal Reserve’s plan to begin winding down its balance sheet and speculation the European Central Bank could be nearing the end of its bond-buying spree. The ECB in December extended its bond-buying program to December 2017 from March, but said it would reduce the size of monthly purchases from 80 billion euros ($85.6 billion) to €60 billion beginning in April.
Declaring it the “only one flow that matters,” analysts led by Michael Hartnett observed that $1 trillion of financial assets bought by the European Central Bank and Bank of Japan year-to-date would equal a $3.6 trillion annualized pace, which would be the strongest since 2007 (see table below).
Hartnett and company argue that this continuing “liquidity supernova” remains the “best explanation” why global stocks and bonds are “both annualizing double-digit gains [year to date] despite Trump, Le Pen, China, macro…”
The S&P 500 SPX, -0.22% is up around 5.1% in the year to date, while the MSCI World Index, which tracks stocks across 23 developed market countries, is up 5.5%. The SPDR Bloomberg Barclays International Treasury Bond exchange-traded fund BWX, +0.07% is up 3.8% since the end of last year.