BAML: The '$1 trillion flow that conquers all' explains everything happening in markets

The global markets all come down to central banks.

At least that’s the argument of Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch.

In a note to clients on Thursday on “the $US1 trillion flow that conquers all,” Hartnett observed that the amount of financial assets added to central banks’ balance sheets is the “one flow that matters” in the market.

“$US1 trillion of financial assets that central banks (European Central Banks & Bank of Japan) have bought year-to-date (= $US3.6tn annualized = largest CB buying in past 10 years); ongoing Liquidity Supernova best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro,” Hartnett wrote.

Put another way, the $US1 trillion in bonds and stocks bought since the start of 2017 by central banks like the ECB, BOJ, Swiss National Bank puts purchases on pace for $US3.6 trillion in buying this year, the highest dating back to the start of the global financial crisis in 2007.

Hartnett argues this big increase in central bank balance sheets has held down bond yields and supported stock prices. So, even with rising geopolitical uncertainty that one would think might put a dent in markets, there has been relative stability in Hartnett’s eyes.

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