Draining Liquidity Signals Trouble For Equities
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Not a pretty day for the Nasdaq 100 or many of its prominent names. The index fell nearly 1.4%, but in some cases, such as Palantir (PLTR), the losses were much worse. The move appeared to be a de-leveraging event, at least from what I could see, and what it looked like, with many of the high-flyers that had driven the index higher in recent weeks taking a hit.
If you’ve been following this commentary, or my free work elsewhere, you shouldn’t be entirely surprised—I’ve been telegraphing the liquidity drain hitting the market since mid-July. To be frank, if today’s decline is tied to that drain—as I believe it is, based on the optics—then this selloff is likely just the beginning of a larger liquidity-driven event.
The reverse repo facility is empty, as we’ve discussed, and the TGA needs to rise back to $850 billion, with $300 billion coming out of reserves and draining liquidity from the system. The other factor is that, as the Treasury continues to issue debt over the balance of the year, there will be no reverse repo facility to offset the drain. That means funding will have to come from other sources, one of which could be primary dealer balance sheets.
Primary dealers are major participants in overnight repo, but if their balance sheets become saturated with Treasuries, they will prioritize funding those positions, leaving less capacity and higher costs for equity repo
The next big settlement date is on Thursday, which can serve as confirmation of today’s price action or not.
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Big Changes Ahead After Reverse Repo Drops To $33 Billion
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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