Liquidity is a key factor in market finance. Without it, risky assets in the stock market, equities and cryptocurrencies lose their fuel. Over the cycles, one thing has become clear: the direction of financial markets is strongly correlated with that of global liquidity. But liquidity is not a single indicator: it is organized into three complementary layers. Understanding these layers enables us to better anticipate major trends. Level 1 is global monetary liquidity (M2). Level 2 concerns net liquidity within the financial system, and level 3 encompasses overall macro-liquidity, through activity and credit indicators. Together, these three dimensions form the markets' “bloodstream”.
The chart below compares the S&P 500 trend with the global money supply M2
Level 1: Global monetary liquidity (global M2)
The first stage of the rocket: global M2. This monetary aggregate measures the sum of the money supply (M2) of the major economies - USA, China, Eurozone - converted into US dollars. It includes sight deposits, savings accounts and certain short-term instruments, representing the gross liquidity immediately available in the global economy.
This level of liquidity is directly influenced by monetary (key rates, QE/QT), fiscal and wage policies. The evolution of the US dollar plays a crucial role: a strong dollar mechanically reduces global M2 in USD, while a weak dollar increases it. In this respect, Chinese and American dynamics are often divergent, as they are driven by different credit logics (centralized planning on the Chinese side, rate-based adjustment on the US side).
But beyond the absolute level, it is above all the momentum of M2, its first derivative (annual variation), that serves as a compass. An uptrend coupled with positive momentum strongly favours risky assets. Conversely, stagnation or a negative divergence between trend and momentum (as at the end of 2021) anticipates a contraction in valuations. Over this cycle, there is even a correlation coefficient of 0.80 between global M2 and Bitcoin, projected 12 weeks into the future: liquidity leads, markets follow.
Level 2: Net liquidity of the financial system
The second level is more subtle, but just as decisive: net liquidity within the financial system. This is the effective credit capacity, i.e. the funds actually available to irrigate the real economy after withdrawals, excess reserves and regulatory mechanisms. Unlike M2, this measure does not reflect gross liquidity, but rather the liquidity “actionable” by financial institutions.
In the United States, this net liquidity depends, among other things, on FED mechanisms such as the reverse repo program (RRP), which temporarily sucks in or releases liquidity, and on the level of banks' excess reserves. Its evolution is strongly linked to the central bank's restrictive or accommodating monetary policy, QE cycles and QT cycles.
The correlation of this net liquidity with the S&P 500 and Bitcoin, although slightly lower than that of global M2, remains significant. It acts as a filter for gross liquidity: even if M2 is high, if credit capacity is blocked by excessively high rates or constrained reserves, the impact on markets can be neutralized.
Level 3: Global macro liquidity
Finally, the third level: global macro liquidity. It includes barometers of economic conditions that directly influence risk perception and investor appetite: PMI indices (manufacturing and services), credit conditions, employment levels, default rates, etc. It is less monetary, more conjunctural. It is less monetary, more cyclical, but its impact is real, as it shapes the context in which financial liquidity is expressed.
It is this level that contextualizes the first two: a rising M2 in a deteriorating economic environment (PMI below 50, falling employment) may have a limited effect. Conversely, signs of economic recovery may reinforce the transmission of liquidity to the markets. In this sense, the timing of the FED's rate cuts becomes a key macro catalyst. As long as US policy remains restrictive, M2 will plateau and net liquidity will remain constrained, even if the ECB or PBoC relax their conditions.
Conclusion: Global liquidity cannot be summed up in a single indicator. It's an ecosystem structured on three levels: global gross liquidity (M2), effective credit capacity (ECC) and net liquidity.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
The chart below compares the S&P 500 trend with the global money supply M2
Level 1: Global monetary liquidity (global M2)
The first stage of the rocket: global M2. This monetary aggregate measures the sum of the money supply (M2) of the major economies - USA, China, Eurozone - converted into US dollars. It includes sight deposits, savings accounts and certain short-term instruments, representing the gross liquidity immediately available in the global economy.
This level of liquidity is directly influenced by monetary (key rates, QE/QT), fiscal and wage policies. The evolution of the US dollar plays a crucial role: a strong dollar mechanically reduces global M2 in USD, while a weak dollar increases it. In this respect, Chinese and American dynamics are often divergent, as they are driven by different credit logics (centralized planning on the Chinese side, rate-based adjustment on the US side).
But beyond the absolute level, it is above all the momentum of M2, its first derivative (annual variation), that serves as a compass. An uptrend coupled with positive momentum strongly favours risky assets. Conversely, stagnation or a negative divergence between trend and momentum (as at the end of 2021) anticipates a contraction in valuations. Over this cycle, there is even a correlation coefficient of 0.80 between global M2 and Bitcoin, projected 12 weeks into the future: liquidity leads, markets follow.
Level 2: Net liquidity of the financial system
The second level is more subtle, but just as decisive: net liquidity within the financial system. This is the effective credit capacity, i.e. the funds actually available to irrigate the real economy after withdrawals, excess reserves and regulatory mechanisms. Unlike M2, this measure does not reflect gross liquidity, but rather the liquidity “actionable” by financial institutions.
In the United States, this net liquidity depends, among other things, on FED mechanisms such as the reverse repo program (RRP), which temporarily sucks in or releases liquidity, and on the level of banks' excess reserves. Its evolution is strongly linked to the central bank's restrictive or accommodating monetary policy, QE cycles and QT cycles.
The correlation of this net liquidity with the S&P 500 and Bitcoin, although slightly lower than that of global M2, remains significant. It acts as a filter for gross liquidity: even if M2 is high, if credit capacity is blocked by excessively high rates or constrained reserves, the impact on markets can be neutralized.
Level 3: Global macro liquidity
Finally, the third level: global macro liquidity. It includes barometers of economic conditions that directly influence risk perception and investor appetite: PMI indices (manufacturing and services), credit conditions, employment levels, default rates, etc. It is less monetary, more conjunctural. It is less monetary, more cyclical, but its impact is real, as it shapes the context in which financial liquidity is expressed.
It is this level that contextualizes the first two: a rising M2 in a deteriorating economic environment (PMI below 50, falling employment) may have a limited effect. Conversely, signs of economic recovery may reinforce the transmission of liquidity to the markets. In this sense, the timing of the FED's rate cuts becomes a key macro catalyst. As long as US policy remains restrictive, M2 will plateau and net liquidity will remain constrained, even if the ECB or PBoC relax their conditions.
Conclusion: Global liquidity cannot be summed up in a single indicator. It's an ecosystem structured on three levels: global gross liquidity (M2), effective credit capacity (ECC) and net liquidity.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
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This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
相關出版品
免責聲明
這些資訊和出版物並不意味著也不構成TradingView提供或認可的金融、投資、交易或其他類型的意見或建議。請在使用條款閱讀更多資訊。