Positive correlation between global money supply (M2) and risky assets on the stock market
The equity and crypto-currency markets represent the category of so-called risky assets on the stock market, i.e. financial assets with a high expectation of gains associated with a proportionally high risk of loss.
Correlation studies show that risky assets on the stock market are highly correlated with global liquidity trends, i.e. the sum of the money supply of the world's major economies. Clearly, when the underlying trend in global liquidity is upwards, the S&P 500 and the bitcoin price also follow an upward underlying trend, and vice versa.
There are several ways of representing a country's monetary supply, and it is the M2 monetary aggregate that is accepted as the best measure of a country's available liquidity.
Global M2 liquidity is therefore calculated by aggregating the money supply of the world's major economies, notably the United States, China and the European Union, and then converting it into US dollars (USD) for the sake of monetary consistency. Changes in the exchange rate of the US dollar against a basket of major currencies therefore directly influence this measure: a strong dollar reduces the value of global M2 in USD, while a weak dollar increases it, affecting capital flows and global financial conditions. Naturally, the monetary liquidity available in the United States (US M2) plays a decisive role, and is directly linked to the monetary policy pursued by the FED.
The Federal Reserve's (FED) monetary policy outlook plays a key role: a restrictive policy (rate hikes, balance sheet reduction) dampens US M2 and strengthens the dollar, while an accommodative policy stimulates liquidity and can weaken the greenback. China's M2, largely influenced by credit policy and the PBoC's control of the yuan, often contrasts with the dynamics of the US M2.
On the graph attached to this analysis, a table summarizes the major components in the calculation of global liquidity (global M2). The trend of the US dollar against a basket of major currencies (the DXY) and the American, Chinese and European M2s are decisive.
The bitcoin price is influenced by the global money supply trend with a time lag
Correlation studies show a positive correlation between global liquidity trends and S&P 500 and BTC trends. These studies reveal another important piece of information: the time lag between global liquidity and risky assets on the stock market, ranging from 75 to 110 days.
It takes time for available liquidity to flow into risky assets on the stock market, if and only if macro-economic fundamentals allow.
As the chart shows, global money supply has rebounded strongly since the start of the year, so it could come to support risky assets in the second stock market quarter, naturally if the trade war remains under control and stock market fundamentals don't get in the way.
GENERAL 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 equity and crypto-currency markets represent the category of so-called risky assets on the stock market, i.e. financial assets with a high expectation of gains associated with a proportionally high risk of loss.
Correlation studies show that risky assets on the stock market are highly correlated with global liquidity trends, i.e. the sum of the money supply of the world's major economies. Clearly, when the underlying trend in global liquidity is upwards, the S&P 500 and the bitcoin price also follow an upward underlying trend, and vice versa.
There are several ways of representing a country's monetary supply, and it is the M2 monetary aggregate that is accepted as the best measure of a country's available liquidity.
Global M2 liquidity is therefore calculated by aggregating the money supply of the world's major economies, notably the United States, China and the European Union, and then converting it into US dollars (USD) for the sake of monetary consistency. Changes in the exchange rate of the US dollar against a basket of major currencies therefore directly influence this measure: a strong dollar reduces the value of global M2 in USD, while a weak dollar increases it, affecting capital flows and global financial conditions. Naturally, the monetary liquidity available in the United States (US M2) plays a decisive role, and is directly linked to the monetary policy pursued by the FED.
The Federal Reserve's (FED) monetary policy outlook plays a key role: a restrictive policy (rate hikes, balance sheet reduction) dampens US M2 and strengthens the dollar, while an accommodative policy stimulates liquidity and can weaken the greenback. China's M2, largely influenced by credit policy and the PBoC's control of the yuan, often contrasts with the dynamics of the US M2.
On the graph attached to this analysis, a table summarizes the major components in the calculation of global liquidity (global M2). The trend of the US dollar against a basket of major currencies (the DXY) and the American, Chinese and European M2s are decisive.
The bitcoin price is influenced by the global money supply trend with a time lag
Correlation studies show a positive correlation between global liquidity trends and S&P 500 and BTC trends. These studies reveal another important piece of information: the time lag between global liquidity and risky assets on the stock market, ranging from 75 to 110 days.
It takes time for available liquidity to flow into risky assets on the stock market, if and only if macro-economic fundamentals allow.
As the chart shows, global money supply has rebounded strongly since the start of the year, so it could come to support risky assets in the second stock market quarter, naturally if the trade war remains under control and stock market fundamentals don't get in the way.
GENERAL 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.
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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.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
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.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.