Illiquidity - swings become exaggerated

Macro Perspectives: Wed 23 Feb 22

It's been three months now since satellite images showed a Russian troop build-up on the Ukraine border.

Now, after a LOT of posturing, a line has apparently been crossed and "costs" have been imposed on Russia, from the West. These costs include an asset freeze on three Russian banks, and sanctions on all members of Russian parliament. The U.K. followed suit by sanctioning three (3) oligarchs, all of whom have previously been, and still remain, sanctioned by the U.S.

Keep in mind, Biden lobbed warnings of sanctions as early as December 7th - it's safe to say, there has been plenty of time to move money.

With that in mind, consider this chart below...

This chart explains the wild swings we're seeing in stocks (and markets, broadly). Liquidity has dried up.

The end of crisis-level monetary and fiscal stimulus (i.e. the closing of the global liquidity spigot), should (and has) triggered the exit and repatriation of some foreign capital from Western capital markets (namely stocks and Treasuries). In fact, December was the biggest outflow of foreign money (from the U.S. capital and financial accounts) since September of 2020.

Add to this, at precisely the same time (over the past three months), this geopolitical event has bubbled up. With sanctions telegraphed, and World War 3 prognostications loosely thrown around, it's an environment for foreign capital to be on the move (not just Russian).

This all results in lower market liquidity.

So, after two years of a liquidity deluge, we're now seeing the effects of illiquidity on markets. Translation: The swings become exaggerated.