DECEMBER 2025
The chart below helps to explain the recent market volatility.
The net US liquidity indicator is a blunt tool that tracks how much money is washing around the financial system,
It combines the Federal Reserve balance sheet, the Treasury General Account (TGA) and the reverse repo facility.
A rising indicator reflects more money being pumped into the system, which typically boosts risk asset prices. The converse is also true.
The metric has recently fallen to a multi-year low; the result of a declining Fed balance sheet, a draining of the reverse repo facility and a spike in the TGA. The latter has had a big impact with the US government shutdown causing the Treasury department to save more and spend less for a multi-week period.
This has all culminated in a sharp tightening of financial conditions and a bout of market unrest.
Encouragingly, the Fed has announced the end of its balance sheet contraction and the TGA will start to bleed down with the US government shutdown now over. So liquidity conditions should soon stabilise and that would dampen the recent market headwind.
For several years, the Federal Reserve and other Central Banks have been the dominant players in setting global financial conditions.
But that trend may be changing.
US bank loan growth is, slowly but surely, accelerating to a multi-year high.
This is not being led by the demand side. With the notable exception of the AI-capex boom, US consumption and investment levels remain sluggish.
However, the Trump administration is making banking deregulation a policy priority.
That is freeing up the commercial bank balance sheets, via less stringent reserve requirements, and sparking a nascent upturn in private sector credit creation.
Improved liquidity conditions should follow.
The Chinese authorities are now at least as influential as their US counterparts in setting the tone for global liquidity conditions.
So the chart below highlights a key support for risk assets as we head into 2026.
The People’s Bank of China (the Central Bank) has been consistently expanding its balance sheet in recent years, reflecting its ramp up in monetary support.
This means more liquidity has been flooding into the local financial system; a key driver of the recent rally in Chinese equities.
It’s safe to assume that some of the excess liquidity has also made its way beyond China’s borders, supporting risk assets in general.
With the Chinese economy suffering another growth setback, and deflationary pressures becoming more entrenched, the odds strongly favour this balance sheet expansion continuing into next year.
On a standalone basis, that creates a tailwind for domestic Chinese assets. And likely some foreign markets too.
For a quick take on global financial conditions, look no further than how the US dollar and Bitcoin are trading.
They are two of the most liquidity-sensitive assets, albeit for very different reasons.
The blue line (left axis) shows the Bitcoin price over the past 12 months. It had been rallying for most of the year, but has fallen sharply (from a record price around U$125k) ever since liquidity conditions began deteriorating in early October.
Similarly, the US dollar (red line, right axis) has seen a sharp trend reversal over the past few months. The trade-weighted DXY index has bounced 4% from its September low, again reflecting tighter liquidity and the increased risk aversion.
It is no coincidence that both trends have stabilised since mid-November. This tallies with the Fed’s surprise U-turn, which signalled the end of quantitative tightening and a tentative return to buying securities.
This marks a pronounced move towards more monetary easing which, in theory, should see the DXY resume its downtrend and risk assets (including Bitcoin) start to recover.
The fact that both assets have shown a muted response to the Fed volte-face is a little concerning. It suggests investors are concerned the fresh liquidity flows will be too modest to spark a big “risk on” move.
As a first step, however, it looks like a big enough policy change to make a major market downturn less likely.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication the views expressed and opinions given are correct but cannot guarantee this and readers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Any companies cited in this report are used to support the view of the authors, and should not be construed as recommendations to purchase or sell the underlying securities. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility of any direct or indirect or consequential loss suffered by a reader or any related person as a result of any action taken, or not taken in reliance upon the content of this communication.
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