Market Downturn Ahead? Citi Strategist Warns Of Hit As Central Banks Unwind $800B Stimulus

Equities and other risk assets will take a hit when central banks pull away as much as $800 billion of stimulus that was deployed to boost the global economy, a Citigroup strategist reportedly said.

The risk rally has been fueled by the injection of over $1 trillion of central bank liquidity, and high-frequency liquidity indicators suggest this is already stalling, wrote Matt King, Citi's global markets strategist, in a note published late Tuesday, according to Bloomberg.

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Major equity indices have recorded net gains this year so far despite looming concerns over high inflation, possibilities of recession and the banking crisis that unfolded in March. The SPDR S&P 500 ETF Trust (NYSE:SPY) gained over 8% since the beginning of 2023 while the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) gained over 20% during the period.

King said that in addition to the monetary support deployed by other central banks, the Federal Reserve has also bolstered its balance sheet by $440 billion in the wake of the U.S. banking crisis. This global wave of policy support has "held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations," he wrote.

The Fed is on track to shrink the size of its massive stock of cash and bonds for many more years, and will likely face several years of negative net income, Reuters reported last week citing a report from the New York Fed.

Pressure Loss: According to King, the policy support is set to unwind as China's central bank reins in easy policy settings amid robust growth, while central banks in the U.S. and Europe rekindle quantitative tightening.

"We now expect almost all of them to stall or go into outright reverse. We think this could subtract $600 billion — 800 billion in global liquidity in coming weeks, undermining risk in the process," King wrote in the note.

"With peak liquidity past, we would not be at all surprised if markets were now to experience a sudden pressure loss," he said according to the Bloomberg report.

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