Cash holdings don't suggest a market turn

IT may be common knowledge, but it's still worth repeating: After years of extremely accommodative monetary policy, there is ample liquidity supply seeking its way through the economic system. In fact, despite moves to tighten policy, the aggregated balance sheet of the G4 central banks will not reach its peak until the second half of 2018.

The global financial crisis demanded extraordinary central bank measures with quantitative easing pressing interest rates and yields lower, in order to avoid an even more severe recession and to buy time for politicians to undertake much-needed policy reforms, predominantly in the developed markets.

In the immediate years after the crisis, central bank liquidity mostly got stuck in the financial sector, hence we saw a stronger growth of the monetary base than in the broader money supply aggregates such as M2. But with the healing of the financial sector, liquidity started to spread from 2011 onwards into real-estate markets, other asset classes and later on into the broader economy.