Net liquidity injection into the global financial system could drop to zero or negative by the end of this year, according to a DBS Bank economist. The Fed’s balance sheet reduction plan is to increase the tapering amount gradually each quarter to reach US$50 billion a month in October 2018, and maintain it at that level thereafter.
The European Central Bank has been lowering its QE amount during the past 2 years to 30 billion euros a month from January- September 2018. It is possible that the bank could withdraw all the easing in October.
The European economy has been expanding stronger than anticipated and broaderbased. Meanwhile, the BOJ has shifted its focus to yield curve control instead of QE amount. As a result, the money supply expansion rate has been on a declining trend during the last 4 years.
While the global liquidity withdrawal is in process, inflation is now tilting to the upside. Over the next 2 years, we foresee total returns for US treasuries, German Bunds, and Japan Government Bonds are likely to be flat to negative. If this is the case, we might see further flows from fixed income markets into equities.