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Trade Desk Thoughts:

Global Liquidity Drip Feed Still In Place

There were references to quantative easing at the G-20 meeting in Scotland this weekend, and the speed that the developed economies can be taken off the drip-feed of central bank liquidity.

"It is too early to start to lean against recovery," said U.S. Treasury Secretary Tim Geithner in his speech. "The classic mistake in past crises was to put on the brakes too quickly."

The under-capitalization of the banking system is still cause for concern, with the XLF, the exchange traded fund for the U.S. financial sector, able to hold near to 52 week highs at 15.76, but still worth 50% less than September 2007 valuations. That may fuel the on-going concerns of under-performing loans.

The Global Economic Prospects and Principles for Policy Exit from the IMF looks at a Usd that is close to fair value in the near-term, but is seen as stronger than may be warranted going forward. The pressure coming from its use as the short side of the carry trade may be hard to unwind until quantative easing (QE) has been reversed. That leaves the door open for long-gold, and long-oil plays to continue to attract speculative interest.

According to the IMF, the pace of recovery will be hampered by most regions continuing to err on the side of ongoing repairs to the financial system. If QE is not going to be easily unwound, and the G-20 meeting gave no indication that it easily would be, then rising asset class valuations, backed by central bank liquidity, will support this year's global equity market moves. How easily those valuations will be able to be added to is another story.

Disclosure: No positions