Reply #16: Analysis: Global markets wilt on worries liquidity drying up

[EuroObserver]

Thu Mar 9, 2006 8:33 AM GMT LONDON (Reuters) - Investors have worried about the withdrawal of global liquidity from financial markets since the beginning of the Federal Reserve's interest rate tightening cycle back in mid-2004. The question on Wednesday -- as global assets ranging from stocks to bonds and commodities to high-yield currencies took a hit -- was whether the worries are finally taking tangible form.

It looked a bit like it for some of the day. Stock markets were generally lower and short-term European debt yields rose to three-year highs, adding to a global yield surge this month. Emerging markets and high-yielding currencies were much in focus. Turkey's stock market, for example, lost as much as 5.5 percent at one point while Iceland's crown lost 4 percent against the dollar. Add to that commodities, the star performers of recent years. The Reuters/Jefferies CRB commodities index was at levels some 9 percent lower than at the beginning of February.

Such across-the-board losses are reasonably unusual and could be a harbinger for further asset sell-offs if the global liquidity picture is changing significantly. "When all markets fall, it's a sign that liquidity is being withdrawn," said Stephen Lewis, chief economist at Monument Securities in London.

The concern is that global interest rates are rising, and may be rising higher than initially expected. Such moves stand to drain the flood of money that has been in the global economy, and hence markets, for much of this decade. The Fed, for example, could go to 5 percent or even higher, dashing hopes that it is ready to pause. The European Central Bank, meanwhile, has just started tightening. ...more...