Markets Setup for Rollercoaster Ride in 2023

Key Takeaways

• Recent increases in global liquidity have been a driving factor in this year’s market rally.
• There is evidence supporting potential trend continuation in the coming weeks, as there are still multiple headwinds that could drag on markets as we move closer to late Q1/Q2.
• Funding liquidity will remain a key risk throughout the year, especially for high-growth industries (like crypto). We’ve noted that the move to a more expansionary global liquidity environment is the most important catalyst for a renewed and sustainable bull run in our view.
• The global liquidity cycle showed signs of bottoming back in Q4, which coincided with the October lows.
• The effects of this reversal on financial markets usually lags anywhere from 6-18 months, which is why we’re more bullish on 2H 2023 and 2024-2025.

See our Markets Year Ahead report for more detail on the biggest macro and market trends we’re tracking for 2023.

Markets Get The Green Light (For Now)

2023 is setting up to be a rollercoaster ride for markets. Risk assets are off to a roaring start this year, with crypto leading the charge.One of the key catalysts has been an increase in global liquidity, largely driven by China’s PBoC and, to a lesser extent, the Fed. Liquidity from the latter is supporting money markets even as “headline QT” continues. This is a trend that could continue through the better part of Q1 as the US debt ceiling debacle forces the TGA to be drawn down. Funds have also started to flow out of the RRP, both of which are offsetting declines in the Fed’s balance sheet (shadow “QE”). See our Market