LONDON Reuters -- A sudden drop in U.S. stocks at the end of last week that morphed into widespread weakness in global markets on Monday can be traced to sudden shifts to large pools of central bank liquidity rather than hawkish rhetoric from global policymakers.
In a note released on Monday, Matt King, a global markets strategist at Citibank, noted that the U.S Federal Reserve's reserves fell by $460 billion last week, the single biggest weekly drop on record.
U.S. stocks are set to have a rough start to the week, with index futures down 1%. Wall Street fell more than 2.5% on Friday, marking the third week in a row of losses for both the S&P 500 and the Nasdaq. King estimates that a $100 billion drop in reserves translates to a 1% drop in stocks, referring to quantitative tightening or the policy of central banks draining surplus cash from the markets, in a note titled Sudden stealth QT weaker markets.
QT is likely to make the outlook for global liquidity look more like the first quarter than the spring break markets have been afforded in recent weeks, he said.
World stocks are having their worst quarter this year since the coronaviruses outbreak in March 2020, while U.S. stocks are down nearly 12% from its peak earlier this year.
With defensives the latest big outperformer, they are now expensive, leaving very few places to hide, Morgan Stanley said in a note. The S&P 500 could finally catch up to the average stock and enter a bear market.